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Key Takeaways

• Defense ETFs outperformed in 2025 as global conflicts and NATO's higher spending targets boosted the sector.
• SHLD and PPA are ETFs that may benefit as Q4 earnings reveal how backlogs convert into revenue growth.
• Rising AI, cybersecurity and tech adoption are expanding revenue streams for diversified defense companies.

The narrative of 2025 was defined by a historic decoupling — while the broader market grappled with tariff volatility and high interest rates, the defense sector operated in a league of its own. Driven by intensifying global conflicts and a fundamental shift in NATO spending priorities, Defense Exchange-Traded Funds (ETFs) delivered extraordinary outperformance compared to the broader market’s benchmark last year. 

As the sector gears up to kick off the fourth-quarter 2025 earnings season next week, investors are likely to be shifting their focus from geopolitical headlines to hard balance sheets. This reporting cycle should serve as a critical validation point, revealing how record-breaking government contracts are finally converting into bottom-line growth and enhanced shareholder value.

Factors Likely to Have Boosted Defense Stocks in Q4

As we enter the fourth-quarter earnings season, defense stocks continue to be fueled by aggressive upward revisions in global military spending.

While NATO grabbed headlines with its June 2025 pledge to spend 5% of GDP on defense and security infrastructure by 2035, the Indo-Pacific region saw an equally intense arms race. India’s 2025-2026 defense budget reached a record $78.3 billion, up 9.5% year-over-year, while China holds on to its 10-year streak of single-digit increases at 7.2%.

These defense spending increases have clearly driven meaningful order growth for top contractors, which should be reflected as solid backlog growth in the upcoming quarterly results.

While the majority of such backlog boost should translate into a steady revenue stream for these weapons manufacturers in the future, parts of it are also responsible for delivery and subsequent revenue generation in the fourth quarter alone. Lockheed Martin (LMT - Free Report) raised its 2025 sales outlook in the third quarter, likely supported by strong sales expectations for the fourth quarter.

Beyond the geopolitical boost, the rapid rise of AI and the consequent increase in usage for tech products ranging from cybersecurity to sensor systems are fueling enormous revenue growth for diversified defense companies like L3Harries Technologies (LHX - Free Report) and RTX Corp. (RTX - Free Report).

This shift to tech-driven growth beyond traditional weapon supply provides a level of stability and "idiosyncratic protection" against the broader market volatility seen in late 2025, making Defense ETFs a premiere destination for investors seeking growth that is insulated from general economic slowdowns.

Strong Momentum Ahead of Q4 Results

As the fourth-quarter earnings season approaches, Defense ETFs might have benefited from the tailwinds highlighted earlier, potentially boosting quarterly results.

To this end, we focus on the Zacks Earnings Trend report, issued on Jan. 21, 2026. This shows that the Aerospace sector, housing such defense stocks, is expected to report earnings growth of 63.6% on 12.2% revenue growth, while total S&P 500 earnings for the October-December quarter are expected to be up 8.7% on 7.9% revenue growth from last year’s level.

4 Defense ETFs to Watch

Given the robust numbers expected from the defense companies during the fourth-quarter earnings season, the following defense ETFs may offer diversified exposure to the structural growth drivers outlined above.

Global X Defense Tech ETF (SHLD - Free Report)

This fund, with net assets worth $6.98 billion, offers exposure to 49 defense technology companies. Its top three holdings constitute major defense contractors: Lockheed Martin (8.38%), RTX Corp. (7.54%), and General Dynamics (GD - Free Report) (7.19%).

The SHLD ETF has surged 91.1% over the past year. The fund charges 50 basis points (bps) in fees.

SPDR S&P Aerospace & Defense ETF (XAR - Free Report)

This fund, with net assets under management (AUM) worth $5.95 billion, includes 40 U.S.-listed aerospace and defense companies. Its top three holdings include: Karman Holdings (KRMN) (4.70%), Rocket Lab (RKLB - Free Report) (4.33%), and Kratos Defense (KTOS - Free Report) (4.19%).

The XAR ETF has soared 60.3% over the past year. The fund charges 35 bps in fees.

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

This fund, with net assets worth $14.84 billion, includes 41 U.S. companies that manufacture commercial and military aircraft and other defense equipment. Its top three holdings include: GE Aerospace (GE - Free Report) (19.88%), RTX Corp. (15.67%), and Boeing (BA - Free Report) (8.44%).

The ITA ETF has gained 51.4% over the past year. The fund charges 38 bps in fees.

Invesco Aerospace & Defense ETF (PPA - Free Report)

This fund, with a market value worth $7.88 billion, includes 60 companies involved in the development, manufacturing, operations and support of U.S. defense, homeland security, and aerospace operations. Its top three holdings include core-defense contractors: Boeing (9.11%), RTX Corp. (8.40%), and Lockheed Martin (8.20%).

The PPA ETF has gained 45.9% over the past year. It charges 58 bps in fees.

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