Defense stocks, particularly those with European exposure, fell sharply on Dec 15, 2025 (as reported by CNBC), after President Zelenskyy indicated that Ukraine is willing to forgo its long-term NATO membership bid in exchange for security guarantees.

This news, while sparking hopes of progress toward a peace framework, cooled near-term demand expectations for Europe’s arms makers, resulting in share price dips.

For investors, this pullback opens a classic buy-the-dip window in diversified defense exchange-traded funds (ETFs) that spread risk across U.S. and European names instead of relying on a handful of single stock bets. Diversified ETFs allow exposure to structurally rising defense budgets, NATO’s higher spending targets, and ongoing geopolitical flashpoints while cushioning idiosyncratic drawdowns in individual stocks.

Understanding the Recent Slide in European Defense Stocks

The recent sell-off in European defense giants, such as Rheinmetall RNMBY, Leonardo DRS, and Saab SAABY, is a textbook example of market sentiment reacting to geopolitical optics. 

Defense stocks, particularly in Europe, are highly sensitive to any news suggesting a possible reduction in conflict intensity or military urgency. President Zelenskyy's pivot on NATO membership, framed within ongoing peace discussions, introduced a narrative of potential conflict resolution. This directly challenged the "war footing" demand environment that has buoyed the sector since 2022, leading to a swift sell-off in pure-play defense names like RNMBY and SAABY.

What Lies Ahead for Defense?

A prudent investor knows that despite the current wobble, the long-term investment thesis for global defense remains robust and is supported by structural, rather than transitory, factors.

In fact, even without a NATO bid, Ukraine is negotiating for "NATO-style" security guarantees, which will require European nations to serve as permanent military guarantors. This necessitates sustained, high-level spending on equipment and readiness that far outlasts the current conflict.

Meanwhile, the war in Ukraine has fundamentally and permanently reshaped European security policy, acting as a powerful catalyst for sustained budget increases. To this end, it is imperative to mention that the total military expenditure of NATO members in 2024 reached $1.45 billion, which reflects an increase of 9.6% from 2023 when adjusted for inflation and represents the biggest annual increase in defense spending since 2014. This surely underpins multi year revenue visibility for the entire defense sector. 

One must also consider the fact that the Ukraine conflict is just one facet of a world where geopolitical tensions are intensifying globally with each passing day. Concurrent pressures in the Indo-Pacific and the Middle East are driving allied nations like Japan, South Korea, and Gulf states to similarly bolster their military capabilities.

This creates a diversified global demand base for leading defense contractors, such as Lockheed Martin (LMT Quick QuoteLMT - Free Report) , RTX Corp. (RTX Quick QuoteRTX - Free Report) , and Northrop Grumman (NOC Quick QuoteNOC - Free Report) , which rely on multi-year government contracts, providing strong revenue visibility and order backlogs that insulate them from short-term market fluctuations. Thus, the defense sector's long-term growth remains anchored in a structural, global demand for national security, rather than the headlines of any single conflict.

Defense ETFs to Watch

Given the ongoing negotiations and discussions on NATO-style security guarantees for Kyiv, investors may want to keep the following defense ETFs on their watchlist and consider investing if appropriate.

State Street SPDR S&P Aerospace & Defense ETF (XAR Quick QuoteXAR - Free Report)

This fund, with assets under management (AUM) worth $4.75 billion, provides exposure to 40 large, mid and small cap aerospace and defense stocks. Its top three holdings include prominent defense contractors Rocket Lab RKLB (4.03%), Karman Holdings KRMN (3.78%) and ATI Inc. (ATI Quick QuoteATI - Free Report) (3.66%).

XAR has surged 48.3% year to date. The fund charges 35 basis points (bps) as fees. 

iShares U.S. Aerospace & Defense ETF (ITA Quick QuoteITA - Free Report)

This fund, with assets worth $12.96 billion, offers exposure to 41 U.S. companies that manufacture commercial and military aircraft and other defense equipment. Its top three holdings include prominent defense contractors GE Aerospace (GE Quick QuoteGE - Free Report) (21.65%), RTX (16.17%) and Boeing (BA Quick QuoteBA - Free Report) (8.04%).

ITA has surged 50.2% year to date. The fund charges 38 bps as fees. 

Invesco Aerospace & Defense ETF (PPA Quick QuotePPA - Free Report)

This fund, with market value worth $6.95 billion, offers exposure to 59 companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security and aerospace operations. Its top three holdings include renowned defense contractors RTX (8.71%), BA (8.16%) and GE (7.85%).

PPA has surged 38.6% year to date. The fund charges 58 bps as fees. 

Select STOXX Europe Aerospace & Defense ETF EUAD

This fund, with $1.04 billion in assets, provides exposure to 13 European companies focused on the manufacture, service, supply, and distribution of civil and military aerospace equipment, systems, and technology, as well as defense and protective services equipment and solutions. Its top three holdings include renowned defense contractors Airbus (EADSY Quick QuoteEADSY - Free Report) (19.05%), Rolls-Royce (RYCEY Quick QuoteRYCEY - Free Report) (18.42%) and Safran (SAFRY Quick QuoteSAFRY - Free Report) (18.25%). 

EUAD has rallied 72.7% year to date. The fund charges 50 bps as fees.