3 Defense ETFs to Buy as NATO Spending Hits Record Highs in 2026

Global defense spending reached $2.63 trillion in 2025, up from $2.48 trillion in 2024, with NATO allies and Canada increasing budgets 20% year over year and all 31 NATO members meeting the 2% GDP target for the first time. The article highlights three defense ETFs as direct beneficiaries: SHLD has $8.6B in assets and returned 49% over the past year, XAR returned 69% with equal-weight exposure across 42 holdings, and ITA has $13.5B in assets with heavy concentration in GE Aerospace (19%) and RTX (16%). The tone is constructive for defense equities, especially contractors and suppliers tied to higher global military spending and European rearmament.

Analysis

The important second-order read is that defense is no longer a single-factor “war premium” trade; it is becoming a capex-cycle + software + supply-chain bottleneck trade. The highest-beta beneficiaries are not necessarily the largest primes, but the suppliers and software layers that must scale first when governments accelerate procurement, which explains why an equal-weight structure can outrun the mega-cap basket in the early phase of a rearmament cycle. That also means margins may be strongest in adjacent enablers with pricing power and constrained capacity, while the primes increasingly act as execution and backlog conversion vehicles.

The market is likely underestimating how much of the next leg is already embedded in headline defense budgets and how much still depends on industrial throughput. If spending growth is real but labor, avionics, munitions, and propulsion capacity remain tight, the bottleneck shifts from demand to delivery; that supports suppliers with specialized capacity but creates a later-stage risk of margin pressure as governments push for volume and faster delivery terms. In that scenario, capital-light software exposure like PLTR can retain multiple support longer than hardware-heavy names, but only if it stays perceived as mission-critical rather than a “nice-to-have” analytics layer.

The main contrarian risk is that consensus is treating Europe’s spending acceleration as linear, when in practice it will likely arrive in uneven appropriations, procurement delays, and FX noise. The path to cash flow is also not uniform: U.S.-only portfolios miss the obvious European budget impulse, but international exposure imports policy and currency volatility that can erase some of the apparent upside. Boeing remains a fragile transmission mechanism inside large-cap defense baskets; any operational setback would matter more in concentrated structures than in diversified or equal-weight funds.

Near term, the best setup is to own the theme through structures that reduce single-name execution risk while preserving exposure to the budget step-up. Over months, the cleaner trade is to favor the basket with the most diversified supplier participation over the most concentrated prime exposure, because backlog conversion tends to reward breadth before it rewards scale. Over years, the differentiator will be software, autonomy, and networked battlefield systems, not just missiles and airframes.

Key Decisions for Investors

• Long XAR vs. short ITA for the next 3-6 months: XAR captures broader supplier leverage to procurement acceleration, while ITA is more exposed to single-name execution risk; target is relative outperformance if defense budgets keep broadening beyond the mega-primes.
• Buy PLTR on pullbacks for a 6-12 month horizon, preferably via call spreads to limit multiple compression risk: the thesis is that software content per defense dollar rises faster than platform spend, giving PLTR a higher-duration profile than the hardware basket.
• Use SHLD as the cleanest Europe rearmament proxy, but size smaller than domestic peers due to FX and policy risk; best entry is on broad market weakness when international defense names de-rate faster than U.S. primes.
• Avoid or underweight BA inside large-cap defense baskets until execution improves; if forced to own ITA, hedge with a partial short in BA or pair with XAR to isolate the supply-chain beta while reducing Boeing-specific drag.
• For tactical exposure, consider a call spread on XAR over the next 2-4 months into likely budget headlines; risk/reward favors upside continuation, but use defined-risk structures because equal-weight defense can be choppy on single contract/news shocks.