No stocks go to the moon, of course, not even ones that make and fire rockets. That said, returns in the aerospace and defense sectors have been fairly galactic.
The SPDR S&P Aerospace & Defense ETF (Ticker: XAR), for example, is up 37% year-to-date, more than double the 15% gain in the overall S&P 500.
That means wealth managers who profited from the rally need to decide whether to reduce their allocations when rebalancing portfolios heading into 2026.
Christopher Zook, chairman and chief investment officer of CAZ Investments, says space and defense innovation can play a valuable role in a diversified portfolio because the theme tends not to correlate with much else. Furthermore, the increase in defense budgets in Europe is providing a tailwind to the sector along with the “commercialization” of space.
“Space and defense focused companies are such a unique area that the theme does not tie to other things investors have in their portfolio, such as AI, chips, or technology services like Amazon or Microsoft,” Zook told InvestmentNews.
Zook points to Anduril and Palantir as good examples of innovative companies in the sector.
“They are doing them better and faster. They are more efficient and more effective. The defense budgets are the biggest tailwind. Regulatory shifts are always important to focus on, and geopolitics clearly have to be considered,” Zook said.
Similarly, Phil Scully, co-founder and general partner of Balerion Space Ventures, says the sector provides exposure to secular long-term growth trends in satellite communications, propulsion and power that are largely uncorrelated with traditional equity market drivers. He also notes that global tailwinds coming from the rise of China, US Golden Dome, and Europe rearming are offering near term support.
“Rising defense budgets, particularly among NATO allies and strategic partners, are fueling consistent year-over-year growth in space-related spending and creating durable, long-term revenue foundations. Meanwhile, geopolitical fragmentation has accelerated demand for sovereign space access and secure communications, giving proven providers stronger pricing power and expanded market reach,” Scully told InvestmentNews.
On the flip side, George Schultze, founder & CEO of Schultze Asset Management, believes space is a new and untested investment theme that he considers “high risk and high growth.” At the current moment he is not seeing opportunities in this arena.
“Regarding defense innovation, that’s another new high growth opportunity. Our firm tends to focus on value-oriented securities – purchasing long-standing mature businesses that trade at exceptionally cheap valuations due to temporary factors,” Schultze told InvestmentNews.
Schultze tends to focus directly on companies and less on ETFs and funds when investing in a particular area of the market. Zook, meanwhile, focuses almost exclusively on the private markets when it comes to tapping into the space and defense arena.
“We are seeing some of the most unique and amazing companies developing that fit in the category of ‘disruptive technology,’ in that they are doing things in a very different way compared to the way they have been done in the past. Ultimately, we love companies in both space and defense that are redesigning hardware using the best that modern technology has to offer,” Zook said.
As an example, in the case of space, he is looking at companies that are redesigning delivery systems which enable more rockets to be fired in a shorter period of time to deliver commercial payloads into space.
“Those are the types of companies that we find to be compelling right now,” Zook said.
Balerion’s Scully, however, sees little need to shop in the private markets when there is no shortage of top notch publicly-traded space and defense tech companies, as well as space-focused ETFs.
“What's really interesting is that institutional allocators are increasingly carving out dedicated space infrastructure allocations within their portfolios. They're recognizing that space is becoming its own asset class – similar to how telecom infrastructure or data centers evolved,” Scully said.
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