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Riding the Wave: Defense ETFs to Watch After the US-UK Tech Pact

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The recently signed U.S.-UK Technology Prosperity Deal (“TPD”) should fuel significant growth in defense exchange-traded funds (“ETFs”), as both these nations agreed to collaborate on strengthening their respective defense bases. This landmark agreement, with a combined investment of over $350 billion from the private and public sectors, will particularly benefit defense companies that leverage artificial intelligence (AI) and data analytics.

The Rise of AI in Defense

In recent times, AI-driven defense companies have seen more traction because modern warfare is no longer just about hardware; it's also about information and speed. AI provides a critical edge by enabling militaries to process vast amounts of data from sensors, drones and satellites in real-time. This capability has become vital for making rapid, data-informed decisions on the battlefield, optimizing logistics and identifying threats with unprecedented precision.

With AI’s ability to automate tasks and enhance situational awareness, transforming military operations in modern-day warfare, defense entities are shifting their focus to AI to gain a strategic advantage over adversaries, amid the evolving global geopolitical landscape.

Deal Overview and ETF Connection

The recently signed TPD aims to propel the U.S.-U.K. special relationship into a new technological era. The deal's direct connection to defense ETFs, particularly those holding AI-driven defense-focused companies like Palantir, L3Harris Technologies, and Lockheed Martin, lies in its emphasis on strengthening the defense industrial base.

The TPD includes a commitment for the UK to purchase over $80 billion in goods from U.S. tech and defense companies over the next five years, with Palantir expected to secure a substantial contract.

By formalizing this partnership and injecting billions of dollars in investment, this strategic alignment is likely to drive revenue growth for companies with significant government defense-focused contracts. For investors, this makes defense ETFs with holdings in these companies more attractive, as the deal serves as a long-term catalyst for growth and validates the growing importance of AI in national security.

Defense ETFs to Watch

Considering the aforementioned discussion, the following defense ETFs, holding major AI-driven defense-focused firms, can be expected to gain substantially in the coming days and thus, should find a place in a prudent investor’s watchlist. In fact, these ETFs are already rallying year to date, amid rapidly intensifying hostilities across the globe recently, as one will see below:

Select STOXX Europe Aerospace & Defense ETF ((EUAD - Free Report) ): This fund includes Europe-based defense companies, with U.K.-based BAE Systems (10.9%) in its top five holdings, which currently remains focused on strengthening its AI-driven defense technologies.

EUAD has gained 85.4% year to date. The fund charges 50 basis points (bps) in fees.

Global X Defense Tech ETF ((SHLD - Free Report) ): This fund includes global defense technology companies, with its top five holdings constituting U.S.-based Palantir (9.4%), RTX Corp. (7.6%) and Lockheed Martin (7%), along with U.K.-based BAE Systems (7.2%), all of which are engaged in AI-focused defense technologies. Geographically, it maintains the largest holding in the United States (57.9%), followed by the UK (9.4%).

SHLD has gained 78% year to date. The fund charges 50 bps in fees.

SPDR S&P Aerospace & Defense ETF ((XAR - Free Report) ): This fund includes U.S.-listed defense companies, with its top three holdings in U.S.-based Kratos Defense & Security Solutions (6.1%), Rocket Lab (5.3%), and AeroVironment (4.6%), all of which are heavily involved in AI-based defense technology.

XAR has gained 36.8% year to date. The fund charges 35 bps in fees.

iShares U.S. Aerospace & Defense ETF ((ITA - Free Report) ): This fund includes U.S. companies that manufacture commercial and military aircraft and other defense equipment. Its top five holdings include GE Aerospace (22.1%), RTX Corp. (14.7%), Boeing (8.2%), Axon Enterprise (4.5%) and Howmet Aerospace (4.5%), which are involved in AI-driven defense technology innovation.

ITA has gained 39.9% year to date. The fund charges 38 bps in fees.

Invesco Aerospace & Defense ETF ((PPA - Free Report) ): This fund includes companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. Its top five holdings include Boeing (7.6%), RTX Corp. (7.5%), Lockheed Martin (6.9%) and Northrop Grumman (5.1%), which are engaged in AI-focused defense technology. Geographically, it maintains the largest holding in the United States (96.6%).

PPA has gained 32% year to date. It charges 57 bps in fees.

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