A proposed $1.5 trillion U.S. defense budget for FY2027, framed by policymakers as an "Arsenal of Freedom" expansion of American military power, 42% above current levels, is drawing focus to aerospace and defense ETFs, as the scale and composition of spending point to a sustained rearmament cycle rather than a short-term boost.
“This budget builds this arsenal without compromising readiness that will ensure we remain the world’s premier fighting force, we protect the homeland, and we create peace through strength now and into the future,” read the press release on the U.S. Department of War website.
More than $756.8 billion is earmarked for new capabilities and industrial base expansion, while allocations include $74 billion for drones and counter-drone systems, $65.8 billion for shipbuilding, over $75 billion for space, and over $20 billion for cyber. The breadth of spending is critical for ETFs, which capture exposure across primes, suppliers, and emerging defense technologies.
ETF Positioning Across The Defense Stack
The iShares U.S. Aerospace & Defense ETF (BATS:ITA), with a market-cap-weighted approach, remains the most direct play on large contractors. Its top holdings include Lockheed Martin Corp (NYSE:LMT), Northrop Grumman Corp (NYSE:NOC), and RTX Corporation (NYSE:RTX), all of which are tied to high-value programs such as missile defense, stealth aircraft, and classified systems. These segments align closely with budget priorities like the "Golden Dome" missile shield and nuclear modernization.
The SPDR S&P Aerospace & Defense ETF (NYSE:XAR) offers a different exposure profile. It uses an equal-weight structure and largely contains mid- and small-cap firms, many of which sit deeper in the supply chain. With procurement shifting toward replenishing depleted inventories, particularly munitions and tactical systems, these companies are positioned for higher order growth rates relative to large primes.
The Invesco Aerospace & Defense ETF (NYSE:PPA) provides broader thematic exposure, including cybersecurity, intelligence, surveillance, and space-linked names. This aligns with budget increases in cyber operations and the near-doubling of U.S. Space Force funding.
Flows and performance tied to earnings momentum
Recent earnings from major contractors reinforce the ETF case. Northrop Grumman has reported strength in its space and aeronautics segments, while Lockheed Martin continues to benefit from sustained demand for missile systems and combat aircraft.
These trends show stable revenue visibility through multi-year backlogs, a key driver for ETF performance. Large contractors typically operate with order backlogs spanning several years, providing earnings durability that supports sector-wide valuations.
Munitions Demand Broadens The Trade
A defining feature of the current cycle is the rapid depletion of Western weapons stockpiles due to the Russia-Ukraine war and rising Middle East tensions involving Iran. This has shifted procurement toward high-volume, repeat-order categories such as ammunition, drones, and missile systems.
For ETFs, this expands the opportunity set beyond traditional platforms. Equal-weight funds like XAR, with greater exposure to component manufacturers and subsystem suppliers, may capture more upside from this replenishment cycle compared with cap-weighted peers.
Unlike prior defense upcycles, the FY2027 budget emphasizes simultaneous investment across air, land, sea, space, and cyber domains. Combined with a planned increase of over 44,000 active personnel and ongoing geopolitical tensions, spending visibility remains high.
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