The Middle East conflict, now stretching beyond a month, has lasted significantly longer than initially anticipated. With little clarity or progress on the diplomatic front between Washington and Tehran, the path toward de-escalation remains highly uncertain.

Rising geopolitical tensions are reshaping global markets, providing structural support for increased defense spending. This trend is underscored by President Trump’s reported plans to propose a $1.5 trillion defense budget for the next fiscal year, prioritizing military spending over domestic programs. With volatility driven by geopolitical risks remaining elevated, the current backdrop continues to support the long-term rearmament theme and strengthens the outlook for defense companies.

The S&P 500 Aerospace & Defense Index has surged 57.53% over the past year and returned 7.68% year to date, highlighting strong momentum in the sector. The index has significantly outperformed the broader S&P 500, which has risen 16.08% over the past year but has fallen 3.84% so far this year.

Trump’s Defense Push: Breaking Down the Spending Plan

According to Reuters, President Trump’s proposed defense budget hike marks the largest annual increase in military spending in the post–World War II period. The plan prioritizes ramping up weapons production, replenishing depleted stockpiles and supporting the $185 billion “Golden Dome” missile defense program.

At a private White House event, President Trump emphasized that military spending should be a national priority, as quoted on BBC. Non-defense is set to decline by 10% or roughly $73 billion under the proposed budget, as quoted on BBC. The plan calls for a 42% year-over-year increase in defense spending, bringing the total to roughly $445 billion. Notably, discretionary spending for the Pentagon is expected to reach approximately $1.1 trillion, marking a record high.

Per the abovementioned BBC article, the proposal features troop pay increases and $65.8 billion in shipbuilding investments, including a next-gen “Golden Fleet.” Additionally, it also sets aside unspecified funding for the $185 billion “Golden Dome” program.

What’s Behind the Defense Spending Upswing?

Historically, periods of conflict have driven sustained defense spending cycles and the current environment appears no different. President Trump’s earlier comments on Cuba suggest that geopolitical instability may persist even beyond the resolution of Middle East tensions, reinforcing the case for continued military investment.

Additionally, President Trump’s military reindustrialization efforts could serve as a major catalyst for the defense sector. The need to rebuild inventories, largely drawn down due to conflicts in Israel, Iran and Ukraine, is expected to provide a further boost to U.S. defense contractors.

Taken together, the combination of structural tailwinds, such as sustained geopolitical tensions, rising military modernization efforts and government commitments to long-term defense budgets, is likely to drive increased investment into the defense sector, making greater exposure to the space an attractive strategy.

Defense ETFs to Explore

Investing in defense ETFs may offer a strategic advantage, as these funds tend to perform well during periods of heightened military activity. Additionally, they provide diversified exposure across leading defense contractors.

Investors can consider iShares U.S. Aerospace & Defense ETF (ITA Quick QuoteITA - Free Report) , Invesco Aerospace & Defense ETF (PPA Quick QuotePPA - Free Report) , Global X Defense Tech ETF (SHLD Quick QuoteSHLD - Free Report) , State Street SPDR S&P Aerospace & Defense ETF (XAR Quick QuoteXAR - Free Report) and First Trust Indxx Aerospace & Defense ETF (MISL Quick QuoteMISL - Free Report) .

With a one-month average trading volume of 2.59 million shares, SHLD is the most liquid option, ideal for active trading strategies. However, investors should approach the space with a long-term investment horizon.

ITA has gathered an asset base of $13.38 billion, the largest among the other options. Regarding charging annual fees, XAR is the cheapest options, both charging 0.35%, suitable for long-term investing.

Beyond Defense ETFs

Increasing geopolitical tensions and rising defense spending do more than strengthen core defense contractors. They can create spillover benefits across a range of auxiliary sectors. Below, we have highlighted a few funds that could potentially gain from this backdrop.

Artificial Intelligence and Technology ETFs

AI is now central to military strategy. As modern warfare shifts from hardware to information and speed, AI-driven defense companies are gaining traction, and higher military budgets are likely to create spillover benefits for AI-related firms.

Investors can consider iShares U.S. Technology ETF (IYW Quick QuoteIYW - Free Report) and Fidelity MSCI Information Technology Index ETF (FTEC Quick QuoteFTEC - Free Report) .

Space ETFs

Space is becoming increasingly integral to modern defense operations. As warfare evolves and drone technology advances, nations are investing more heavily in space-based systems to enhance military capabilities. This shift, including the growing militarization of space, is gaining significant momentum.

Investors can consider Procure Space ETF (UFO Quick QuoteUFO - Free Report) and ARK Space & Defense Innovation ETF (ARKX Quick QuoteARKX - Free Report) .