The investment landscape is witnessing a remarkable pivot as investors increasingly allocate capital toward defense-sector ETFs and international markets. This shift represents more than just portfolio rebalancing—it signals a fundamental reassessment of global risk factors and growth opportunities in an increasingly complex geopolitical environment.
Market data from Bloomberg Terminal reveals defense-focused ETFs have experienced inflows exceeding $3.2 billion in the first quarter alone, representing a 47% increase year-over-year. This surge comes amid escalating tensions across multiple global theaters and increased defense spending announcements from NATO countries and their allies.
“We’re seeing unprecedented capital movement into aerospace and defense ETFs,” notes Catherine Yang, senior market strategist at Cornerstone Capital. “Investors are responding to the reality that global security concerns have evolved from theoretical risks to actual budget priorities.”
The iShares U.S. Aerospace & Defense ETF (ITA) and the SPDR S&P Aerospace & Defense ETF (XAR) have both outperformed broader market indices, delivering returns of 12.4% and 10.8% respectively year-to-date, compared to the S&P 500’s 8.7%. This performance disparity underscores the market’s confidence in sustained defense spending increases across Western democracies.
Beyond the defense sector, international exposure—particularly to emerging markets—has reemerged as an attractive proposition for investors seeking diversification and growth potential. ETFs tracking developing economies have witnessed net inflows of approximately $7.1 billion this quarter, with particular interest in funds focusing on India, Southeast Asia, and select Latin American markets.
This international allocation trend marks a notable departure from recent years’ home-country bias among American investors. The rotation suggests growing confidence in overseas growth prospects and potentially more favorable valuations compared to U.S. equities, which continue trading at premium multiples despite recent market volatility.
“The pendulum is swinging back toward international diversification after years of U.S. outperformance,” explains Marcus Johnson, chief investment officer at Meridian Advisors. “Investors are recognizing the cyclical nature of market leadership and positioning accordingly.”
Currency considerations also factor prominently in this investment thesis. The dollar’s strength has moderated somewhat in recent months, potentially creating a more hospitable environment for emerging market returns when translated back to USD. Many international ETFs now offer currency-hedged variants, allowing investors to isolate equity performance from currency fluctuations—a feature proving particularly attractive in the current environment.
The enthusiasm for defense and international ETFs coincides with what some analysts describe as “tactical de-risking” from high-growth technology names that dominated portfolios for much of the past decade. This reallocation suggests investors are seeking balance between growth potential and exposure to secular trends like increased defense spending.
ESG considerations have complicated this picture for some institutional investors. Defense stocks traditionally faced exclusion from many sustainability-focused portfolios. However, the industry has witnessed a remarkable reframing, with some fund managers now categorizing defense capabilities as essential to maintaining democratic institutions and global stability.
“The definition of responsible investment continues to evolve,” says Elena Martinez, ESG research director at Global Asset Management. “We’re witnessing a more nuanced conversation about defense spending as an element of social stability rather than an automatic exclusion category.”
Looking ahead, market observers anticipate continued strong performance from defense-oriented ETFs as government spending commitments translate into multiyear revenue visibility for major contractors. The sustainability of international ETF momentum will likely depend on multiple factors, including monetary policy divergence between major economies, commodity price trajectories, and resolution of ongoing geopolitical tensions.
For retail investors navigating these trends, experts recommend considering both strategic and tactical allocation approaches. The defense sector trend appears to have staying power beyond short-term market cycles, while international exposure provides valuable diversification benefits during periods of U.S. market uncertainty.
As always, understanding the underlying holdings and methodologies of ETFs remains crucial. Defense-focused funds vary significantly in their concentration among prime contractors versus smaller supply chain companies, while international ETFs differ in their country allocation, sector weightings, and currency hedging approaches.
The current rotation toward defense and international ETFs ultimately reflects investors’ adaptation to a changing global landscape—one where security concerns command greater attention and economic growth increasingly emanates from beyond U.S. borders. This evolution in market preference suggests a maturing perspective on global risks and opportunities that will likely influence portfolio construction strategies for years to come.
