Why Defense ETFs Led in 2025 — And What That Means for Your Portfolio
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Defense sector ETFs outperformed the broad market in 2025. That wasn’t luck. It was policy, geopolitics, and technology colliding—and the funds that tracked those flows cleaned up.
Why they ran
Governments moved money. Military spending climbed. The war in Ukraine pulled equipment, logistics, and procurement budgets forward. That sent revenue bumps to prime contractors and to the suppliers behind them. It also lit a fire under European defense names that had been overlooked.
Then add tech. Space, satellites, hypersonics, and digital warfare are not abstract concepts anymore. They’re procurement line items. ETFs that include satellite builders and space services rallied as contractors won contracts and venture dollars chased downstream revenue. Investors bought themes, not just balance sheets.
Finally, institutions adjusted portfolio blueprints. The old 60:40 is getting rethought. More shops are adding alternatives and defensive sleeves to blunt volatility. Defense ETFs look like income-plus-growth plays with the added political tailwind of governments that don’t cut defense when the world gets hot.
Which ETFs matter — and the pitfalls
European defense ETFs grabbed attention when money and matériel started flowing to Ukraine. Those funds tend to be concentrated in fewer names and carry currency risk. Good returns. Higher volatility.
Space and thematic ETFs like the Procure Space ETF (ticker UFO) are a different animal. They track niche indices — the S-Network Space Index for example — and often charge higher fees (UFO sits around 75 bps). You pay for the theme. That can work, but thematic funds can last far longer in the drawdown than broad industrial funds.
Across the board, watch three risks: valuation re-ratings, concentration in a handful of big contractors, and liquidity or bid-ask spreads in smaller ETFs. Expense ratio matters. A long-term 0.75% fee on a niche play will eat your excess return fast if the theme stalls.
Call out the BS
Don’t buy the line that defense is only about bombs and carriers. That’s lazy thinking. Today it’s sensors, software, satellites, and supply chains. And don’t swallow Wall Street sales patter about ‘safety’ if the ETF is tightly concentrated or overpriced. Politicians promise cuts in speeches. They authorize spending when the threat is real. Bet on behavior, not rhetoric.
Also, avoid assuming every defense ETF is the same. Pick the one that matches your edge. Want stable cash flows and big primes? Choose broader, low-cost funds. Want growth on emerging tech? Accept the higher fee and volatility of a thematic space ETF.
Reed's actual take: Defense ETFs are not a fad. 2025 proved they can outperform when governments and technology move together. That said, this is a sector, not a cure-all.
What to do: allocate a core position but keep it measured—roughly 3–7% of a conservative portfolio as a defensive-growth sleeve. Add tactical exposure up to 10–15% if you expect prolonged geopolitical tailwinds and you have the stomach for volatility. Prefer low-cost, liquid ETFs for the core. Use thematic or space funds for smaller, conviction bets. Always check expense ratios, AUM, top holdings, and regional weightings. Trim winners and rebalance into weakness. Consider covered-call overlays if you want income and are willing to cap upside.
Final point: markets follow money and contracts. When governments sign checks, revenue shows up on balance sheets. Read the procurement pages, not the headlines. That’s where you find the exits and the opportunities.
