Select STOXX Europe Aerospace & Defense ETF

EUAD

Market cap $1.09B

Active investors have likely gotten the memo that international stocks are throttling U.S. counterparts in 2025. As of Oct. 6, the MSCI ACWI ex USA IMI Index, which combines developed and emerging markets equities, is higher by 29.2% year-to-date compared to a gain of "just" 15.6% for the S&P 500.

The Vanguard S&P 500 ETF (NYSEARCA:VOO ) is the most popular in terms of size, with over $775 billion in total assets under management.

The Select STOXX Europe Aerospace & Defense ETF is well-positioned to benefit from Europe's increasing focus on drone warfare and defense spending. Recent drone incursions and calls for a European 'drone wall' could drive significant demand for anti-drone technology, benefiting EUAD's holdings. EUAD is fairly valued compared to U.S. peers but offers a higher potential upside if European military spending materializes.

Whether it's the U.S. government shutdown, the broader market hitting all-time highs, or perhaps too much exuberance around artificial intelligence (AI), there's plenty of reason to question the elevated valuations of U.S. stocks. U.S. markets are the envy of the world, but every asset has an appropriate value, which is why it can be beneficial for investors to broaden their horizons and look at stocks internationally.

In 2025, the best-performing ETF themes include gold and silver mining (SLVP, RING), bitcoin miners (WGMI), uranium (URA) and defense (EUAD, SHLD).

Defense ETFs are set to rally as the U.S.-UK Technology Prosperity Deal fuels AI-driven defense growth with $350B investment.

Defense ETFs surged as NATO airspace breaches by Russian drones and a major spending pledge fueled investor demand.

It may not be the end of the quarter yet, but we have made it through summer, and that seems like a good checkpoint to evaluate the top ETF investment themes YTD. Let's take a moment to look in this year's thematic ETF rearview mirror.

European defense stocks are poised to benefit from NATO's commitment to increase defense spending, driven by geopolitical tensions and US pressure. I favor the Select STOXX Europe Aerospace & Defense ETF over any single company, using quintessentially U.S. Boeing as an example of the benefits of diversification. European defense companies like Airbus, Rheinmetall, and Saab are highly competitive, with advanced technology rivaling US counterparts and strong prospects from rising budgets.

I rate EUAD a Buy as Europe's defense sector enters a super cycle driven by NATO's increased spending to 3.5% of GDP. EUAD offers convenient, concentrated exposure to top European defense names, with a 12% upside potential plus a 1% dividend yield. Consensus forecasts 20% annual earnings growth with a reasonable 1.3x PEG ratio versus US peers at 2x.