3 Best Defense ETFs as European NATO Countries Diversify Away from U.S. Weapons

European NATO countries are gradually reducing their dependence on the United States for weapons and are starting to buy more military equipment from other allies, such as South Korea, France, and Israel. According to a report from the Stockholm International Peace Research Institute, the U.S. accounted for 58% of major arms imports by European NATO members between 2021 and 2025. That figure is slightly lower than the 64% share recorded in the previous five-year period. This change is happening as defense spending across Europe has surged since Russia's 2022 invasion of Ukraine.Claim 70% Off TipRanks PremiumUnlock hedge fund-level data and powerful investing tools for smarter, sharper decisions Stay ahead of the market with the latest news and analysis and maximize your portfolio's potential As a result, many European governments are strengthening their militaries while also trying to diversify their defense suppliers in case U.S. support becomes less reliable in the future. Nevertheless, the United States is still the world's largest weapons exporter. In fact, shipments of American arms to Europe jumped by 217% during the same period, largely because of military aid and equipment transfers connected to the war in Ukraine. European countries also continue to rely heavily on advanced U.S. systems, especially combat aircraft such as the F-35 fighter jet. Therefore, by the end of 2025, 12 European nations had ordered or planned to order a combined 466 of these aircraft. At the same time, other countries are gaining market share. In fact, South Korea supplied 8.6% of European NATO arms imports, Israel accounted for 7.7%, and France reached a 7.4% share. Overall, global arms transfers increased by 9.2% during the 2021-2025 period. For investors, this growing demand for defense equipment from multiple countries could also benefit defense ETFs that include more international companies. Here are three that stand out: 1. Themes Transatlantic Defense ETF (NATO) This ETF focuses on defense companies located across NATO member countries. As a result, it provides exposure not only to U.S. contractors but also to European firms that could benefit as NATO nations increase military spending. 2. SPDR S&P Aerospace & Defense ETF (XAR) This fund holds a wide range of aerospace and defense companies and uses an equal-weight strategy. Because of that structure, it spreads exposure more evenly across the defense supply chain instead of concentrating heavily in a few large U.S. companies. 3. iShares U.S. Aerospace & Defense ETF (ITA) While this ETF is still dominated by major U.S. defense contractors, many of those companies generate significant revenues from international arms sales. Therefore, it can still benefit from rising global defense demand as more countries increase military budgets. Which Defense ETF Is the Better Buy? Turning to Wall Street, out of the three defense ETFs mentioned above, analysts think that XAR has the most room to run. In fact, XAR's price target of $322.58 per share implies 16.8% upside potential.