President Trump's Foreign Policy Is Causing This ETF to Soar. Should You Invest?

Aerospace and defense stocks are seeing their best run under a president since President George W. Bush, who oversaw the country's reaction to the 9/11 terror attacks and had close ties to the defense industry.

Those stocks outperformed the broader market by 8.7 percentage points under Bush. But so far in President Donald Trump's second term, they're besting the broader market by more than 40 percentage points on an annualized basis. On a one-year basis, defense stocks are having their best year since 2001.

That's as measured by the S&P Aerospace and Defense Select index, which is up 41% this year. Investors interested in an exchange-traded fund (ETF) that will put their money into the stocks in that index can use the SPDR S&P Aerospace & Defense ETF (NYSEMKT: XAR), which tracks it. The fund is up 40% in 2025.

Beefed-up NATO spending

Several components of Trump's foreign and defense policies are pushing defense stocks higher.

First, from the start of his second term, he demanded that NATO members step up their defense spending. The alliance's former goal was for each member nation to spend 2% of GDP on defense.

But under pressure from the White House, in June of this year that goal was boosted to 5% by 2035. That 5% will consist of 3.5% on "pure" defense and the rest on defense-related infrastructure.

Image source: Getty Images.

That's quite an increase, considering that some of the largest economies in the world are NATO members, including Germany, the United Kingdom, and France. Germany, with a GDP of more than $5 trillion, has announced plans to double defense spending within five years, hitting the 5% goal before 2030.

And more recently, the president has been pushing Asian partners -- particularly South Korea, Japan, and Taiwan -- to raise their own defense budgets. It's not surprising that the administration's America First policy would mandate that allies pay more for their own defense instead of relying on the American security umbrella.

Higher earnings expected

All that added spending is expected to increase earnings significantly for aerospace and defense stocks.

The S&P Aerospace & Defense ETF is a great way to play it. The fund has about $4.9 billion in net assets and about 40 holdings. Its top five holdings are:

• AeroVironment, 4.51% portfolio weight.
• Carpenter Technology, 4.06%.
• ATI, 4.02%.
• Rocket Lab, 3.89%.
• BWX Technologies, 3.79%

If those companies aren't immediately familiar, there are many household names in the ETF, too, including GE Aerospace, General Dynamics, Lockheed Martin, and Boeing among many others.

No stock accounts for more than 5% of the ETF, which makes it highly diversified within the defense and aerospace sector. The expense ratio, which investors pay for maintenance and operations, is a relatively low 0.35%.

More defense spending to come

The world has become increasingly dangerous in recent years, with Russia's invasion of Ukraine, a war in the Middle East, and rising tensions in Asia. Global defense spending was already on the rise before 2025, climbing 8.1% in 2024 to $2.3 trillion.

The president's insistence that the U.S. can't be the world's policeman and his demands that allies spend more to protect themselves and rely less on American taxpayers is getting results. Europe is spending more and boosting its economic growth as a beneficial consequence. And now Asian countries are investing more in their own defense, convinced that the U.S. may not be the same treaty partner it has been for most of the postwar period.

That change in defense and security relationships is showing up in aerospace and defense company share prices.

Matthew Benjamin has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends AeroVironment and BWX Technologies. The Motley Fool recommends GE Aerospace and Lockheed Martin. The Motley Fool has a disclosure policy.