Key insights
- Geopolitical tensions, particularly the war in Iran, are boosting defense stocks. NATO's potential increase in defense spending to 5% of GDP by 2035 is a key driver. Aerospace & Defense ETFs (XAR, ITA, PPA) are highlighted as potential investment vehicles, suggesting a bullish outlook for the sector and a moderate positive influence on the broader US market due to increased investor interest.
The current war in Iran has disrupted the global geopolitical landscape and the outlook for U.S. stocks. It has also sent defense stocks soaring.
Over the past year, these three of the biggest aerospace & defense ETFs have outperformed the Vanguard S&P 500 ETF by more than 2x:
Whether it's a global conflict or the need to be prepared for the new artificial intelligence (AI) driven world, the demand for defense and cybersecurity is likely to only increase in the coming years.
Let's take a look at the investment case for this sector and which of the three ETFs listed above might serve you best.
Countries are already spending trillions of dollars on defense, but that number is only going to keep growing.
The biggest driver will be NATO member nations' agreement to invest at least 5% of their annual gross domestic product (GDP) in defense by 2035. Most nations are still operating under the previous 2% of GDP guidance, so a jump to 5% over the next decade would represent significant investment growth in the defense sector.
This type of worldwide defense spending should deliver steady business for defense companies for years to come.
While all of these ETFs have "aerospace & defense" in their names, their underlying strategy produce very different portfolios.
The reasons for choosing each:
With elevated geopolitical risks becoming the norm instead of the exception, investing in defense stocks could be a solid long-term growth play.