According to recent data from the Stockholm International Peace Research Institute (SIPRI), global military expenditure reached a record $2.89 trillion in 2025, marking a 2.9% rise. As a share of GDP, global military spending climbed to 2.5%, its highest level since 2009.

Surprisingly, for the first time in recent history, Europe emerged as the primary forerunner of this growth, beating America, which, however, remained the world’s largest defense spender. 

This increase in defense investment, for the 11th straight year, creates a golden opportunity for investors to choose defense exchange-traded funds (ETFs), which offer a diversified approach to gain exposure to the rising tide of military spending and the subsequent profit growth for defense firms. 

Before choosing such ETFs for your portfolio, one must understand what sustained this 11-year upward trend and what lies ahead for the industry. Keeping this in mind, below, we have analyzed the key factors driving growth, the industry’s outlook, and why ETFs may be a safer vehicle than individual stocks.

Factors Behind the Spending Rally: The Great European Pivot

The 2.9% increase in global military spending was the result of Europe’s dramatic defense investment last year, which outweighed the contraction in U.S. outlays. 

U.S. military spending declined 7.5% to $954 billion, largely due to a legislative "freeze" on new military aid for Ukraine. European nations filled this void with a massive 14% surge in defense investment, which amounted to $864 billion.

Motivated by the ongoing Russia-Ukraine conflict and uncertainty regarding future U.S. security commitments, nations like Poland, Germany and Belgium saw their budgets skyrocket. Poland, for instance, increased its budget by 23%, aiming for a defense-to-GDP ratio of 4.5%—the highest in NATO. 

Consequently, increases by European members of the NATO alliance led to the sharpest annual growth in Central and Western Europe since the end of the ???Cold War (as cited in Reuters).

On the other hand, the world's second-largest economy is estimated to have increased its military spending by 7% to $247 billion in 2025 (as per China’s official defense budget), thereby contributing significantly to the global spending.

Outlook: Demand Beyond Missiles and Jets

The global defense industry’s outlook remains robust. Considering the ongoing crisis in the Middle East, as well as many nations having increased their long-term military spending targets of late, the industry can be expected to continue its solid growth momentum through 2026 and beyond.

Importantly, rising demand is not limited to direct combat weapons like missiles or fighter jets. A parallel surge in spending on techno warfare products, such as cybersecurity, surveillance drones, and electronic warfare systems, is further bolstering the industry. 

Against this backdrop, with the United States planning a potential rise to $1.5 trillion in 2027 and Europe locked into multi-year rearmament programs, the industry is entering a "super-cycle" of sustained demand.

Why Should You Pick ETFs Over Individual Stocks?

Considering the aforementioned discussion, it is reasonable to project that prominent defense firms like Lockheed Martin (LMT Quick QuoteLMT - Free Report) or RTX Corp. (RTX Quick QuoteRTX - Free Report) will enjoy a multi-year order backlog and subsequent profit growth over the coming years.

Yet, holding these stocks individually carries idiosyncratic risks like production delays, regulatory hurdles, or missed earnings, which can cause sharp volatility in one’s portfolio and result in sudden valuation loss. 

In contrast, an ETF holds LMT, RTX, plus dozens of other defense primes and thereby ensures that a setback for one defense contractor doesn't derail your entire portfolio.

Defense ETFs to Buy

Investors seeking to capitalize on this 11th straight year of rising military spending may add the following defense ETFs to their portfolios:

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

This fund, with net assets worth $13.37 billion, offers exposure to 44 U.S. companies that manufacture commercial and military aircraft and other defense equipment. GE Aerospace (GE Quick QuoteGE - Free Report) , RTX and Boeing (BA Quick QuoteBA - Free Report) hold the first three positions in this fund, with 19.31%, 15.06% and 10.48% weightage, respectively. 

ITA has surged 38.5% over the past year. The fund charges 38 basis points (bps) as fees and holds a Zacks ETF Rank #2 (Buy). It traded at a volume of 1.16 million shares in the last trading session. 

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

This fund, with a market value of $7.93 billion, offers exposure to 61 companies involved in the development, manufacturing, operations, and support of U.S. defense, homeland security and aerospace operations. BA, GE and RTX hold the first three positions in this fund, with 9.29%, 7.78% and 7.09% weightage, respectively. 

PPA has soared 36.5% over the past year. The fund charges 58 bps as fees and holds a Zacks ETF Rank #2. It traded at a volume of 0.23 million shares in the last trading session. 

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

This fund, with assets under management (AUM) worth $5.92 billion, offers exposure to 41 large, mid, and small-cap aerospace and defense stocks. Rocket Lab, BWX Technologies and Hexcel hold the first three positions in this fund, with 3.74%, 3.71% and 3.57% weightage, respectively. 

XAR has rallied 49.7% over the past year. The fund charges 35 bps as fees and holds a Zacks ETF Rank #2. It traded at a volume of 0.23 million shares in the last trading session.