Aerospace & Defense ETFs at a One-Year High: Here's Why

Amid escalating geopolitical tensions, global defense spending reached an all-time high of $2,718 billion in 2024, according to the Stockholm International Peace Research Institute (SIPRI). This marks a 9.4% year-over-year increase—the sharpest annual rise since the Cold War era.

The top five spenders—the United States, China, Russia, Germany and India—accounted for 60% of the global defense budget, reflecting a high concentration of military outlays. U.S. military expenditure grew by 5.7%, reaching $997 billion and accounting for 37% of total global defense spending.

No wonder, exchange-traded funds like iShares U.S. Aerospace & Defense ETF ITA, Invesco Aerospace & Defense ETF PPA and SPDR S&P Aerospace & Defense ETF XAR are trading at a 52-week high. So far this year, ITA has gained 14.3% versus 0.3% loss seen in SPDR S&P 500 ETF Trust SPY.

Let’s delve a little deeper.

Defense spending by European Union (EU) member states is set to increase significantly in the next two years. Goldman Sachs expects the EU to gradually increase its annual defense spending by around €80 billion ($84 billion) by 2027—equivalent to roughly 0.5% of GDP, according to the report dated Feb. 27.

Defense expenditures in the euro area accounted for 1.8% of GDP in 2024 and Goldman Sachs Research expects them to rise to 2.4% by 2027. Germany’s military spending jumped 28% to $88.5 billion in 2024, becoming the world’s fourth-largest. Sweden, in its first year as a NATO member, hiked defense spending by 34% to $12 billion. Poland increased its budget by 31% to $38 billion.

Amid growing security concerns, global defense spending has been rising since Russia’s invasion of Ukraine. Following Russia’s invasion, Europe significantly increased its purchases of military equipment from non-EU suppliers.

Despite this, larger EU nations have traditionally relied on domestic companies for defense procurement. Europe’s share of global arms production, fell between 2008 and 2016, but has picked up since then.

All 32 NATO members increased defense budgets in 2024, according to SIPRI, with 18 countries meeting or topping the bloc’s 2% of GDP target. Military spending has also surged amid renewed U.S. pressure, with Trump urging NATO to hike defense outlays to 5% of GDP. He also warned of a possible U.S. troop withdrawal from Europe if the bloc fails to meet the higher targets.

With military budgets rising worldwide, defense and aerospace stocks are gaining strong traction among investors. Several companies in this sector have posted substantial returns across various timeframes.