Defense ETFs Find A New Weapon: The Algorithm - Boeing (NYSE:BA), BAE Systems (OTC:BAESY)

Defense ETFs are becoming increasingly fascinating plays in the market, and it’s not just global tensions driving the rally. There’s a new catalyst in town: algorithms. With the U.S. and U.K. recently inking the MoU of the Technology Prosperity Deal (TPD), which includes a $42 billion investment in UK AI technology from U.S. tech giants, investors are looking at ETFs that invest in companies leveraging AI for defense.

SHLD is primed to benefit from the rise in AI-powered defence contracts. Track real-time prices here.

Some ETFs have already reached multi-year highs in 2025. The STOXX Europe Aerospace & Defense ETF (BATS:EUAD), with significant exposure to U.K.-based BAE Systems Plc (OTCPK: BAESY) (12.2%), has risen 87% this year as the firm accelerates the development of its AI-powered defense solutions. On Monday, the fund closed 1.54% higher.

The Global X Defense Tech ETF (NYSE:SHLD), which includes Palantir Technologies Inc (NASDAQ:PLTR), Lockheed Martin Corp (NYSE:LMT), and BAE Systems, gained 80%, due to its skewed bet on AI-laden defense disruptors. It closed 1% in the green on Monday.

The iShares U.S. Aerospace & Defense ETF (BATS:ITA), controlled by GE Aerospace owner General Electric Co (NYSE:GE), RTX Corp (NYSE:RTX), and Boeing Co (NYSE:BA), has gained approximately 41% year-to-date. The SPDR S&P Aerospace & Defense ETF (NYSE:XAR), whose largest holdings include Kratos Defense & Security Solutions Inc (NASDAQ:KTOS) and Rocket Lab Corp (NASDAQ:RKLB), gained 36.8%, as investors position about firms making AI the focal point of drones, satellites, and next-generation weaponry.

What is powering these significant returns?

The TPD makes AI a pillar of U.S.-U.K. future defense collaboration, encompassing over $80 billion worth of British purchases of U.S. defense and technology products over five years. That makes the door potentially open to significant government contracts (of which Palantir is already a prime beneficiary), which in turn supports constituents’ earnings outlooks in ETFs.

The transition also recontextualizes the way investors think about defense ETFs. Conventional hardware plays a role; the funds are now surrogates for the ascent of AI in national defense. From battlefield command and control to logistical efficiency, AI is no longer an adjunct but the weaponry itself.

For investors, the lesson is obvious: defense ETFs are no longer tracking missiles and planes; now they are tracking algorithms. And with government expenditures nailed down on both sides of the Atlantic, AI-powered defense funds might have just started their ascent.

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