ZACKS·2025-09-16 16:26Core Insights - The recent incursions of Russian drones into Polish airspace have triggered a direct response from NATO forces, marking a significant escalation in European security dynamics [1] - Following these events, there has been a notable increase in defense equities as global investors anticipate heightened military spending and demand for advanced military capabilities [2] Defense ETFs Performance - Major U.S.-listed defense ETFs such as Global X Defense Tech ETF (SHLD), iShares U.S. Aerospace & Defense ETF (ITA), Select STOXX Europe Aerospace & Defense ETF (EUAD), SPDR S&P Aerospace & Defense ETF (XAR), and Invesco Aerospace & Defense ETF (PPA) have all outperformed the S&P 500, which gained 1.2% since the incursions [3] - The significant gains in these defense ETFs are attributed to their exposure to leading defense contractors like Lockheed Martin, RTX Corp., and Northrop Grumman, which typically benefit from increased government contracts during conflicts [4][5] Market Dynamics - The surge in defense ETFs is not solely due to the recent airspace violations but also reflects a broader trend following NATO's commitment to increase defense spending from 2% to 5% of GDP, a historic bipartisan agreement [6] - U.S.-based defense contractors in these ETFs have substantial exposure to the European defense market, leading to investor confidence in steady revenues from long-term government contracts [7] Individual ETF Performance - Select STOXX Europe Aerospace & Defense ETF (EUAD) has risen 7.3% since the Polish airspace breach, outperforming other defense ETFs due to the strong performance of European defense companies [9] - Global X Defense Tech ETF (SHLD) has increased by 6.3%, benefiting from its significant focus on European markets [10] - SPDR S&P Aerospace & Defense ETF (XAR) has gained 3.7%, while iShares U.S. Aerospace & Defense ETF (ITA) and Invesco Aerospace & Defense ETF (PPA) have risen by 2.8% and 2.3% respectively [11] Investment Outlook - The defense industry is positioned as a key area for investors seeking resilience and growth amid rising geopolitical risks and military modernization efforts globally [8][12]