Why Modern Investors Are Rethinking Defense-Sector Industrial ETF Exposure

The industrial sector has demonstrated remarkable strength throughout the current year, with gains substantially exceeding broad market benchmarks. Yet beneath this headline success lies a more nuanced story: specialized defense-technology plays are increasingly outpacing conventional industrial holdings, prompting portfolio managers to reassess their sector allocation strategies.

The Evolution of Industrial ETF Investing

Traditional approaches to industrial ETF investing have centered on diversified baskets of mature companies—think Vanguard Industrials ETF (VIS), which encompasses 391 holdings and trades with a razor-thin 0.09% annual expense ratio. This fund has indeed delivered solid returns, appreciating nearly 20% year-to-date while maintaining the stability that attracts conservative investors seeking broad exposure to the industrials sector.

However, the landscape is shifting. A newer entrant, the Global X Defense Tech ETF (SHLD), illustrates how industrial sector exposure is undergoing transformation. Launched in September 2023 with $4.97 billion in assets, this specialized fund demonstrates that growth-oriented frameworks can thrive within traditionally cyclical sectors.

Beyond Aerospace: The Technology Integration

The critical distinction between established industrial ETFs and next-generation alternatives lies in their exposure to emerging technologies. Conventional industrial ETFs allocate heavily to classical aerospace and defense manufacturers like Boeing and Lockheed Martin. By contrast, the Global X fund positions Palantir Technologies as its premier holding—a signal that modern defense spending increasingly prioritizes artificial intelligence, cyber defense infrastructure, and autonomous systems.

This 14.6% technology allocation within the Global X fund represents something fundamental: how nations conceptualize security has evolved. Warfighting methodologies now emphasize digital capabilities alongside traditional manufacturing prowess. Intelligence gathering, data processing, and autonomous platforms now occupy central roles in defense strategies worldwide.

Geographic Diversification as Competitive Advantage

A major limitation of traditional industrial ETFs is their domestic-only focus—a constraint that the Vanguard Industrials ETF exemplifies. This overlooked consideration becomes significant when recognizing that defense spending acceleration is truly global.

The Global X Defense Tech ETF addresses this gap by maintaining 37% exposure to international equities. German holdings comprise 8% of the portfolio, particularly relevant given Berlin’s commitment to double defense expenditures over the next five years. French equities represent 5.5% of the fund, with Paris projecting its 2027 defense budget to reach double the levels from a decade prior.

This geographic diversification captures an essential megatrend: multiple nations simultaneously recognizing that national sovereignty and economic security demand substantially increased defense investments.

The Verdict: Choosing Between Approaches

For investors seeking conventional, broad-based industrial sector participation, traditional vehicles like Vanguard’s offering remain viable. For those with higher risk tolerance and conviction around the defense-technology thesis, the Global X fund presents a differentiated opportunity to capture how industrials are actually evolving—through the lens of technology integration, international expansion, and modern security paradigms.