Key Takeaways:
NATO's 2035 defense spending target has created a decade-long revenue pipeline for defense contractors, and three US-listed ETFs offer distinct ways to capture it.
The SPDR S&P Aerospace & Defense ETF gained 33% over the past year, outpacing the iShares Aerospace & Defense ETF at 29%, as NATO's 5% of GDP defense pledge drives sector demand. Alliance members committed to the target at the June 2025 Hague Summit, splitting spending between 3.5% for core military capabilities and 1.5% for resilience and security covering cyber defense, critical infrastructure, and supply chain innovation. Global defense outlays reached $2.63 trillion in 2025, and for the first time, every NATO ally met the previous 2% of GDP floor.
"The accountability piece separates this commitment from past NATO promises," Goldman Sachs said in its 2026 outlook, noting that Europe's defense sector has transitioned from an undervalued market to a central focus of government policy. Allies must submit annual incremental plans demonstrating progress through 2035, converting a political pledge into a programmable revenue stream for contractors.
Three US-listed ETFs offer distinct exposure to the spending wave. The iShares U.S. Aerospace & Defense ETF (ITA) returned 29% over the past year and holds $13.49 billion in net assets across 43 positions, with GE Aerospace at 19% and RTX at 17%. The SPDR S&P Aerospace & Defense ETF (XAR) gained 33% over the same period, using modified equal weighting to lift mid-cap suppliers such as Curtiss Wright, HEICO, and TransDigm to roughly the same weight as Lockheed Martin. The Invesco Aerospace & Defense ETF (PPA) returned 24% over the past year but leads on a five-year basis at 131%, extending into defense electronics, government IT contractors, and cybersecurity vendors.
How the ETFs Diverge
ITA concentrates on mega-cap primes, making it the most liquid and lowest-cost vehicle for investors who expect the largest US contractors to capture most of the procurement cycle. The tradeoff: nearly 45% of assets sit in three companies, meaning a single bad earnings cycle can drag the entire fund. XAR's equal-weight methodology has paid off during this cycle, with a five-year return of 106% and year-to-date gains of 14%. The fund reaches further into emerging defense technology including drones, autonomous systems, and counter-UAS capabilities — areas funded by NATO's resilience tier.
PPA maps most directly to the 1.5% resilience spending commitment. The fund's mandate covers cyber defense, civil preparedness, and supply chain innovation, areas where ITA has minimal exposure. Its five-year return of 131% is the highest of the three, suggesting the broader basket compounds well over longer holding periods, though diversification beyond the primes dilutes upside in quarters when traditional contractors lead.
The Pentagon's FY 2027 budget request totals $1.45 trillion in budgetary resources, a 44% increase from the FY 2026 enacted level. Poland, the Baltic states, and Greece already spend above 4% of GDP, setting a precedent that eastern-flank countries will follow. NATO Secretary General Mark Rutte said at a June 25 Atlantic Council event that allies will announce tens of billions of dollars in new defense contracts at the July 7-8 summit in Ankara, Turkey.
For investors, the choice among the three ETFs depends on which part of the defense value chain they expect to outperform. ITA suits a bet on mega-cap primes. XAR captures the supplier layer with higher volatility. PPA offers the broadest read on the defense-industrial complex, including the cybersecurity and IT services that NATO's new spending framework explicitly funds.
This article is for informational purposes only and does not constitute investment advice.
