Defense ETF Strategies in the Ukraine Context: Why Now Might Be the Time to Act

On December 15, 2025, European defense contractors experienced a notable pullback following President Zelenskyy’s announcement that Ukraine may pursue “NATO-style” security arrangements rather than formal NATO membership. The market’s immediate reaction—sharp declines in stocks like Rheinmetall (RNMBY), Leonardo (DRS), and Saab (SAABY)—reflects a common investor misreading: confusing near-term sentiment swings with fundamental shift in long-term demand.

For those tracking Ukraine-related geopolitical developments, this dip presents an instructive lesson in separating noise from signal. The defense sector’s structural tailwinds remain intact, and investors focused on multi-year trends rather than headline reactions can find compelling opportunities in diversified defense ETFs that balance risk across both American and European manufacturers.

The Market’s Overreaction: Reading Between the Lines

The sell-off in European defense equities wasn’t driven by deteriorating fundamentals, but rather by a shift in the perceived urgency narrative. Investors who had positioned for sustained conflict intensity suddenly reconsidered their thesis when peace negotiations appeared to gain traction. This is classic momentum-driven trading rather than rational repricing of underlying cash flows.

Rheinmetall (RNMBY), Leonardo (DRS), and Saab (SAABY) all experienced sharp declines because these pure-play European defense names are viewed by markets as direct proxies for conflict intensity. The pivot in Ukraine’s positioning on NATO membership—even framed within ongoing security discussions—created a false narrative suggesting reduced military demand ahead.

Yet here’s what disciplined investors should recognize: Ukraine may not seek NATO membership in the traditional sense, but it is actively negotiating for security commitments that functionally require NATO members to maintain elevated military readiness. These guarantees necessitate sustained weapons procurement, ammunition replenishment, and force modernization—all multi-year purchasing cycles that won’t evaporate based on a diplomatic framework shift.

The Structural Case for Defense Remains Unshaken

Global defense spending tells a story the headlines often obscure. NATO member nations collectively spent $1.45 trillion on military expenditure in 2024, representing a 9.6% increase from 2023 when adjusted for inflation. This marks the largest annual increase since 2014 and reflects a fundamental reassessment of security priorities across the alliance.

The Ukraine conflict served as a watershed moment for European security policy. Decades of underinvestment in military capabilities suddenly appeared untenable as geopolitical risk materialized. Germany, Poland, and other NATO members revised defense budgets upward—changes unlikely to reverse regardless of how any single conflict concludes.

Beyond Europe, concurrent tensions shape a distinctly multipolar security environment. The Indo-Pacific theater presents ongoing friction points, while Middle Eastern volatility remains elevated. Japan, South Korea, Australia, and Gulf states are simultaneously expanding military spending, creating a genuinely diversified global demand base for defense capabilities. This global diversification matters enormously for multinational contractors like Lockheed Martin (LMT), RTX Corp. (RTX), and Northrop Grumman (NOC)—these firms don’t depend on any single geopolitical flashpoint but rather benefit from an elevated baseline of security spending across multiple regions.

Ukraine ETF and Defense Portfolio Opportunities: A Closer Look

Rather than betting on individual defense stocks, investors can achieve better risk-adjusted exposure through diversified ETF vehicles that smooth out single-stock volatility while maintaining meaningful sector participation.

Broad-Based U.S. Defense Exposure

iShares U.S. Aerospace & Defense ETF (ITA) represents one of the most established options in this space. With $12.96 billion in assets under management, the fund provides diversified exposure to 41 U.S. companies engaged in commercial and military aircraft manufacturing alongside defense equipment production. Top holdings include GE Aerospace (21.65%), RTX (16.17%), and Boeing (BA, 8.04%). Year-to-date performance stands at 50.2%, while the fund charges 38 basis points annually.

Invesco Aerospace & Defense ETF (PPA) offers broader sectoral reach with 59 holdings spanning defense, homeland security, and aerospace operations. Assets total $6.95 billion, with top positions in RTX (8.71%), Boeing (8.16%), and GE Aerospace (7.85%). Performance year-to-date reached 38.6%, with annual fees at 58 basis points. This slightly higher fee reflects the expanded mandate and smaller fund size.

State Street SPDR S&P Aerospace & Defense ETF (XAR) focuses on smaller-cap opportunity within the sector. Managing $4.75 billion across 40 holdings, XAR features Rocket Lab (RKLB, 4.03%), Karman Holdings (KRMN, 3.78%), and ATI Inc. (ATI, 3.66%) as top positions. The fund has appreciated 48.3% year-to-date and charges 35 basis points, making it attractive for growth-oriented investors comfortable with mid and small-cap volatility.

European Defense Concentration

For investors specifically seeking Ukraine-adjacent defense exposure through European manufacturers, Select STOXX Europe Aerospace & Defense ETF (EUAD) provides targeted positioning. With $1.04 billion in assets, the fund concentrates on 13 European firms including Airbus (EADSY, 19.05%), Rolls-Royce (RYCEY, 18.42%), and Safran (SAFRY, 18.25%). EUAD has delivered the strongest year-to-date return among these options at 72.7%, reflecting the market’s prior enthusiasm for European defense plays. Annual fees stand at 50 basis points.

Why Diversified ETFs Trump Single-Stock Bets in This Environment

The pullback in European defense stocks highlights precisely why ETF structures provide superior risk management compared to concentrated single-stock positions. Rheinmetall (RNMBY), Leonardo (DRS), and Saab (SAABY) experienced meaningful declines based on headline risk and sentiment shifts unrelated to their underlying business models.

An investor holding EUAD instead of concentrated positions in these three names would have suffered a smaller drawdown because the European ETF distributes exposure across a wider constellation of companies and geographies. More importantly, the ETF structure maintains exposure to the structural thesis—sustained European defense spending—without the idiosyncratic single-stock volatility that creates unnecessary portfolio drag.

Similarly, U.S.-focused options like ITA and PPA provide natural hedges through diversification. When European sentiment shifts based on diplomatic developments, U.S. contractors like Lockheed Martin and RTX continue benefiting from their own regional demand drivers, geopolitical tensions in the Pacific and Middle East, and embedded multi-year government contracts that insulate revenues from short-term market noise.

The Path Forward: Defense Budgets, Not Headlines

The investment case for defense ETFs—particularly those tracking Ukraine-adjacent opportunities—ultimately rests on boring, structural factors rather than exciting headlines. Governments commit to defense spending through budget cycles that span multiple years. Procurement timelines extend across decades. Geopolitical risk levels remain elevated across multiple theaters globally.

President Zelenskyy’s pivot on NATO membership changes the diplomatic framing but not the underlying security imperative. Ukraine requires sustained military support regardless of membership status. Europe has permanently raised its defense spending baseline. Global allies across Asia and the Middle East continue arms buildups. These currents flow independent of any single peace negotiation outcome.

For portfolio managers and individual investors alike, the current pullback in defense equities represents a temporary dislocation in market pricing rather than a fundamental deterioration in the sector’s investment thesis. Diversified defense ETFs offer a compelling mechanism to maintain structural exposure to these long-term trends while avoiding the single-stock concentration risk that creates unnecessary portfolio volatility during periods of geopolitical headline risk.