Rocket Lab and Kratos aren’t only sending drones and satellites into space—they’re putting defense ETFs into orbit. While these cutting-edge defense stocks rocket on the coattails of fresh Pentagon policy changes and Trump-era deregulation, investors are flocking to ETFs that combine military might with next-generation innovation. With drone demand through the roof and red tape getting burned, funds like Global X Defense Tech ETF (NYSE:SHLD) and SPDR S&P Aerospace & Defense ETF (NYSE:XAR) are becoming stealth champs in 2025’s search for returns.
Defense ETFs are no longer simply the unflappable corner of the marketplace that performs well in times of war. In 2025, they’ve become high-speed vehicles catching the tailwind of advanced technology, military modernization, and now—America’s drone boom. Drone stocks jumped on Thursday night after Defense Secretary Pete Hegseth released sweeping memos to accelerate domestic drone production and deployment. The memos, shared on X (formerly Twitter), will remove bureaucratic roadblocks and give the military the freedom to quickly embrace what Hegseth described as “vital” technologies.
Drone Stocks Get Off the Ground
Investors didn’t hesitate to respond. Kratos Defense (NASDAQ:KTOS), Red Cat Holdings (NASDAQ:RCAT), AeroVironment (NASDAQ:AVAV) and Unusual Machines (AMEX:UMAC) surged after hours on Thursday.
The rally came on the heels of a series of pro-defense, pro-tech executive orders issued in June by President Donald Trump, designed to enhance domestic drone capabilities and counter foreign incursions in U.S. airspace. These policies are speedily reshaping the makeup and appeal of contemporary defense ETFs.
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From Tanks To Tech
With higher worldwide tensions and a Trump 2.0 platform that aligns with Pentagon growth and deregulated purchases, investors are increasingly using defense ETFs as closet growth plays. The Global X Defense Tech ETF (NYSE:SHLD), which aims for pure-play military tech and cybersecurity over old-school aerospace exposure, is heavily invested in Palantir Technologies (NASDAQ:PLTR) and international defense players BAE Systems (OTCPK: BAESF) and Rheinmetall (OTCPK: RNMBF).
Other ETFs, such as the SPDR S&P Aerospace & Defense ETF (NYSE:XAR), also take a more diversified tack with equal-weight strategies that target giants such as Lockheed Martin (NYSE:LMT) and leaner disruptors such as Kratos, which also designs unmanned aerial systems.
ETF Rotation Amid Policy And Dispersion
CFRA Research’s Aniket Ullal observed in an event by Yahoo Finance last month that policy uncertainty during the Trump era is fueling all-time high market dispersion, and sector-specific ETFs such as iShares U.S. Aerospace & Defense ETF (BATS:ITA) and Select STOXX Europe Aerospace & Defense ETF (BATS:EUAD) are becoming top beneficiaries of defense and trade-fueled tailwinds.
Defense and aerospace ETFs have been some of the strongest performers in 2025, said Ullal, adding that when dispersion is high, active ETF strategies and focused thematic exposure, particularly in sectors such as drones and military technology, will outperform.
Meanwhile, European defense exposure is warming up as NATO countries rush to keep up with U.S. defense spending. EUAD, the sole European defense ETF available in the U.S., is 77% higher this year so far on the back of heavy atop positioning in Airbus and Safran.
A Stealth Tech Play For Growth Chasers
Defense ETFs were once seen as “safe” or defensive plays, offering stable returns via long-term government contracts. But in today's market, they’re increasingly about disruption, not just protection.
For weary investors of mega-cap tech prices, defense ETFs exposed to autonomy, AI, and drone systems provide a backdoor entrance into next-generation innovation. As Hegseth dismantles regulatory walls and the Pentagon leans further into automation, these funds are quickly becoming 2025’s biggest surprise growth play.
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