Defense stocks are gaining traction in 2025, driven by heightened global security concerns and robust investor interest. A post from The Kobeissi Letter on X highlights FactSet data showing aerospace and defense exchange-traded fund (ETF) inflows reaching $8.2 billion in the first three quarters of 2025 — a 573% surge compared to 2024.
This spike reflects growing unease over geopolitical tensions and optimism about long-term sector growth, fueled by increased defense spending and new fund launches. With 17 new aerospace & defense ETFs debuting this year versus just two in 2024, investor demand is clear.
This trend suggests the sector could offer significant opportunities, making it a focal point for those looking to capitalize on a potentially volatile landscape. With the Defense Dept. changing its name to the War Dept. to better reflect its priorities, the two “war” ETFs below may be the best way to capture the sector’s growth potential — both long-term and short-term.
SPDR S&P Aerospace & Defense ETF (XAR)
The SPDR S&P Aerospace & Defense ETF (NYSEARCA:XAR) tracks the S&P Aerospace & Defense Select Industry Index, providing investors with broad exposure to a diverse range of companies in the aerospace and defense sector.
In 2025, XAR has delivered impressive year-to-date gains, up more than 44% year-to-date, reflecting the sector’s strength amid rising global tensions. Key holdings driving this performance include its top two holdings, space and defense stock Rocket Lab (NASDAQ:RKLB | RKLB Price Prediction) — up 171% in 2025 — and unmanned dronemaker AeroVironment (NASDAQ:AVAV), up 133%. Among more traditional defense contractors, XAR has positions in Kratos Defense & Security (NASDAQ:KTOS) and Lockheed Martin (NYSE:LMT).
Although the latter is up just 2.5% so far this year, LMT stands out as the world’s largest defense contract and for its dominant role in producing advanced fighter jets, such as the F-35, and missile defense systems, which have seen increased demand as nations bolster their military capabilities.
Additionally, XAR benefits from its inclusion of mid-cap firms like L3Harris Technologies (NYSE:LHX), which excels in communication systems and electronic warfare, further diversifying its portfolio.
This blend of large- and mid-cap holdings offers stability and resilience, making XAR an attractive option for investors seeking consistent growth and lower volatility in the defense space over the long term.
Direxion Daily Aerospace & Defense Bull 3X Shares (DFEN)
The Direxion Daily Aerospace & Defense Bull 3X Shares (NYSEARCA:DFEN) takes a more aggressive stance, aiming to deliver 300% of the daily performance of the Dow Jones U.S. Aerospace & Defense Index. This leveraged ETF has capitalized on the sector’s momentum in 2025, with standout contributions from RTX (NYSE:RTX), GE Aerospace (NYSE:GE), and Boeing (NYSE:BA).
RTX’s Raytheon division has helped deliver 38% gains in 2025 due to its leadership in missile systems, such as the Patriot and SM-6, which are critical for modern defense strategies and seeing robust global orders. GE offers diversification due to its focus on defense contracts and industrial operations, which have been notably strong this year.
Similarly, Boeing — despite facing commercial aviation headwinds — benefits from defense contracts, including the F/A-18 Super Hornet and support for existing fleets, which have provided a steady revenue stream. However, DFEN’s leveraged structure, which rebalances daily, introduces significant risk — its performance can diverge from the index over time, potentially leading to losses even if the sector rises. Even so, DFEN is the best-performing aerospace and defense ETF, rocketing 147% higher this year.
Still, DFEN is unsuitable as a cornerstone ETF for a portfolio and should instead be used as an effective tool for short-term opportunities, capturing amplified upside during periods of defense stock strength. While investors should approach DFEN with caution, if used strategically rather than as a long-term hold, it can help juice a portfolio’s overall return.
Key Takeaway
With defense stocks riding a wave of inflows and geopolitical tailwinds, these ETFs offer distinct ways to engage the sector. XAR provides a balanced, long-term investment option, while DFEN suits those seeking amplified returns with careful timing.
As global tensions persist, these funds could play a key role in portfolios focused on defense growth.
Top Gaining Stocks
Top Losing Stocks