In early February, I recommended that readers take a look at the State Street SPDR S&P Aerospace & Defense ETF (XAR 0.18%). That exchange-traded fund is up about 3.7% from that time. But now I think XAR has even more upside.
The ETF had been rising in early 2026 due to elevated geopolitical uncertainty, increased defense spending, and expectations of even greater government expenditures on military technologies in the near term. It was up about 11% year to date at that point.
But with the war ongoing in the Middle East, the ETF is likely to see further upside. Of course, nobody wants a protracted war in the Middle East — or anywhere else, for that matter. The toll in human lives and suffering is far too great.
SPDR Series Trust – State Street SPDR S&P Aerospace & Defense ETF
Today’s Change
(-0.18%) $-0.50
Current Price
$277.45
But even if the war — hopefully — ends tomorrow, the U.S., which spends more on weapons and defense than the next 10 countries combined, will have to spend an extraordinary amount of money to restock and replenish its arsenal.
One analyst at the Center for Strategic and International Studies estimates the expenditure on U.S. weapons and defense replenishment will be in the “triple-digit billions,” that is, hundreds of billions of dollars.
Image source: Getty Images.
Trump wants a massive increase in defense spending
President Donald Trump is already calling for a 66% increase in the defense budget over the 2026 budget recently passed by Congress. That would take defense spending to about $1.5 trillion. He wants to build a “Golden Dome for America” missile defense system and a “Golden Fleet” of super-advanced guided-missile battleships. These programs would cost trillions of additional dollars.
Several of XAR’s largest holdings are defense contractors that would contribute directly to all of these programs, including Lockheed Martin (LMT 0.32%), Northrop Grumman (NOC 0.24%), and Huntington Ingalls Industries (HII 0.84%).
Lockheed Martin
Today’s Change
(-0.32%) $-2.10
Current Price
$649.12
Northrop Grumman
Today’s Change
(-0.24%) $-1.80
Current Price
$733.18
The U.S., of course, is not the only country looking to beef up defense spending. Global defense spending is expected to hit $2.6 trillion this year, an 8.1% increase over 2025. Spending is forecast to hit $2.9 trillion by the end of the decade.
XAR is a highly diversified fund, and no one stock accounts for more than 5% of it. The three defense firms listed above are among the top five largest holdings in the ETF. Its expense ratio is 0.35%, which is reasonable for an actively managed ETF.
War is a terrible thing, but peace through strength is one way to avoid it. The XAR ETF is a way to profit from that strategy.
