The world’s defense budgets are surging at a pace not seen since the final years of the Cold War — and a new generation of thematic ETFs is giving investors a way to track the shift. The Defiance Drone & Modern Warfare ETF (JEDI) returned 13.9% in January 2026 alone, more than seven times the broader Technology category average of 1.8%, according to Morningstar. The Morningstar article cited reasons including increased interest in companies building autonomous drones, AI-powered battlefield analytics, and next-generation electronic warfare systems. The fund’s early momentum may reflect a broader reality: global military expenditure reached $2.72 trillion in fiscal year 2024, a 9.4% year-over-year increase that the Stockholm International Peace Research Institute characterized as the steepest annual rise in nearly four decades, with analysts projecting that spending will exceed $3.6 trillion by 2030.
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Trade ACHR with leverageWhat makes this spending cycle distinct from previous buildups is where the money is going. The Pentagon’s fiscal year 2026 budget allocated $179 billion to research and development — a 27% year-over-year increase and the largest R&D allocation in the Department of Defense’s history. Within that, $13.4 billion was earmarked specifically for autonomy and autonomous systems, while counter-drone funding across the services reached $3.1 billion. The ratio of R&D spending to traditional procurement has climbed roughly 24% over the past decade, signaling what could be a structural shift: modern military investment is increasingly about software, sensors, and unmanned platforms rather than legacy hardware.
How Drones Are Reshaping Modern Warfare — and Defense Budgets
The conflict in Ukraine has served as the defining proving ground for unmanned warfare. Drone launches escalated from roughly 10,000 per month in 2023 to approximately 10,000 per day by early 2025, according to multiple defense analysts tracking the conflict. Drones have come to play a dominant role in frontline combat, a shift that has rewritten military doctrine worldwide and accelerated procurement timelines across NATO and allied nations. That’s according to Military.com and Lieber Institute, West Point.
The global military drone market was valued at approximately $15.1 billion in 2024 and is projected to reach $29.8 billion by 2030, with more aggressive estimates from defense research firms placing it as high as $47 billion by 2032, according to MarketsandMarkets. Growth rates in the low double digits are projected across major defense market research forecasts, though actual adoption could outpace projections as governments respond to the operational lessons emerging from active conflicts.
Several companies within the defense technology ecosystem illustrate the breadth of this trend. AeroVironment (AVAV), a JEDI top-ten holding at approximately 5.9% of fund assets, is a dominant U.S. manufacturer of small tactical unmanned aircraft systems and loitering munitions, including the Switchblade family that has been widely deployed in the Ukraine conflict. The company’s portfolio spans reconnaissance drones, precision strike munitions, and the JUMP 20 medium-range UAS — positioning it across the full spectrum of battlefield drone demand. L3Harris Technologies (LHX), another top holding, anchors the ISR and electronic warfare layer that enables every modern drone operation, from communications infrastructure to signal intelligence. Kratos Defense & Security Solutions (KTOS) brings a different angle as a specialist in high-performance autonomous drone systems, including low-cost attritable tactical aircraft designed for mass deployment in contested airspace.
On the emerging side of the supply chain, Ondas Holdings (ONDS) represents the growing market for autonomous drone defense systems. Ondas’s Iron Drone Raider counter-UAS platform has secured multi-million-dollar deployments at major European airports, and in December 2025 the company was selected as prime contractor for a large-scale autonomous border-protection program deploying thousands of drones. With Q3 2025 revenue surging 582% year-over-year to $10.1 million and a 2026 revenue target of $110 million per company guidance, Ondas illustrates how quickly demand is scaling for integrated autonomous defense solutions.
Unusual Machines (UMAC) targets a different but strategically important niche: NDAA-compliant, domestically manufactured drone components. As governments and defense agencies move to eliminate Chinese-made drone technology from sensitive supply chains, companies like Unusual Machines may be positioned to benefit from the reshoring of critical drone component production. The company secured a $2.1 million NDAA-compliant drone order in January 2026 and has been expanding its U.S. manufacturing capacity to meet growing defense and enterprise demand.
NATO’s 5% GDP Defense Target: What It Means for Defense Stocks
The June 2025 NATO summit produced what may be the most consequential defense spending commitment in the alliance’s 76-year history. Member nations agreed to raise military expenditure from the previous 2% of GDP target to 5% of GDP by 2035 — with 3.5% directed toward core defense capabilities and 1.5% toward infrastructure, resilience, and defense industrial base expansion. For 2025, NATO reported that all member states except Iceland met the existing 2% threshold for the first time, with five allies already exceeding 3% and two — Lithuania and Poland — surpassing 4%.
The numbers behind Europe’s rearmament are significant in historical context. Collective European defense spending is projected at $693 billion for 2026. Germany alone budgeted €82.69 billion for defense in 2026 and has outlined a path to €162 billion by 2029. Poland, spending 4% of GDP in 2025, is targeting 5–6% by 2030. The European Union launched the SAFE rearmament loan facility totaling €150 billion to finance defense industrial capacity across member states. This is not a one-year procurement spike — it is a structural repricing of European security that is expected to generate sustained demand for defense technology platforms over multiple budget cycles.
What Is the Defiance JEDI ETF and What Does It Hold?
The Defiance Drone & Modern Warfare ETF (JEDI) is a thematic exchange-traded fund that tracks the BITA Drone & Modern Warfare Select Index. Launched in September 2025, the fund holds approximately 28–29 securities spanning six defense technology subsectors: military drones and unmanned systems, AI-driven warfare platforms, electronic warfare, space and satellite defense, military cybersecurity, and autonomous robotics. JEDI carries an expense ratio of 0.69% and is classified as non-diversified.
JEDI’s top holdings reflect a concentrated but diversified approach across the defense technology value chain. As of this report, the largest positions include L3Harris Technologies (LHX) at 7.72%, RTX Corporation at 7.67% (RTX), Rocket Lab (RKLB) at 7.51%, Thales (THLLY) at 6.66%, Saab AB (SAABY) at 6.60%, Kratos Defense (KTOS) at 6.58%, AeroVironment (AVAV) at 5.91%, and Palantir Technologies (PLTR) at 5.43%. The top ten positions account for approximately 65% of assets, with additional exposure to companies like Ondas Holdings (ONDS) and Unusual Machines (UMAC) that represent the autonomous systems and domestic drone manufacturing.
The broader investment context supports the theme’s durability. Defense electronics and systems spending is expected to grow at an 8–9% compound annual rate through fiscal year 2028, according to Forecast International. That spending will be driven by modernization of radar, communications, and surveillance systems. Space-based defense capital expenditure reached $30 billion in fiscal year 2025, with projections pointing toward $45 billion by fiscal year 2028, according to Space Foundation. The Pentagon’s emphasis on counter-drone capabilities, autonomous swarm technology, and AI-enabled command systems suggests that technology-focused defense companies — from established primes like AeroVironment (AVAV) to emerging platforms like Ondas (ONDS) and Unusual Machines (UMAC) — may benefit disproportionately relative to traditional hardware-centric contractors.
Key Risks: What Could Go Wrong for Defense Tech Investors
Defense technology investing carries meaningful risks that deserve equal consideration alongside the growth thesis. Government defense budgets are inherently political and cyclical. While current NATO commitments point toward sustained increases, fiscal pressures, changing administrations, or diplomatic breakthroughs could slow or reverse spending trajectories. The 5% of GDP target requires ratification through domestic budget processes in each member nation — a path that is neither guaranteed nor linear.
Concentration risk is also significant. JEDI’s portfolio is focused entirely within aerospace and defense, meaning it provides no cross-sector diversification. A broad market selloff, shifts in geopolitical sentiment, or sector-specific disruptions — such as contract cancellations or regulatory changes affecting defense exports — could disproportionately impact returns. The fund’s relatively short track record, having launched in September 2025, means there is limited performance history across varying market conditions.
Valuation risk warrants attention as well. Several defense technology names have experienced significant multiple expansion as investor enthusiasm for the theme has grown. Smaller-capitalization holdings in particular — including emerging drone and autonomous systems companies — may carry elevated volatility and execution risk as they scale from early-stage revenue toward profitability. If earnings growth does not meet expectations, or if market sentiment rotates away from the sector, these valuations could compress. Investors should also consider that many defense technology companies compete for a finite pool of government contracts, and award outcomes can be binary in their impact on individual stock prices. Past performance is not indicative of future results.
The Bottom Line on Defense Spending and the JEDI ETF
Global defense spending is undergoing a generational shift — one that is reorienting military investment toward drones, autonomous systems, AI-powered analytics, and electronic warfare at a pace that has few historical precedents. The $179 billion U.S. R&D budget, NATO’s 5% of GDP commitment, and Europe’s multi-hundred-billion-dollar rearmament wave collectively point to a multi-year demand cycle for the companies building the technologies that define modern warfare. From established defense primes like AeroVironment (AVAV) and L3Harris (LHX), to autonomous systems innovators like Ondas Holdings (ONDS), to domestic supply chain players like Unusual Machines (UMAC), the ecosystem of companies driving this transformation is broad and growing.
The Defiance JEDI ETF (JEDI) offers one vehicle for thematic exposure to this trend, with a portfolio spanning the full defense technology supply chain. The opportunity is real, but so are the risks: concentrated sector exposure, political uncertainty around defense budgets, valuation sensitivity, and the inherent unpredictability of government contracting cycles. Investors considering thematic exposure to defense technology should evaluate how it fits within their broader portfolio, risk tolerance, and investment time horizon — and consult with a financial professional where appropriate.
Important Disclosures
The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted. Performance current to the most recent month-end can be obtained by calling 833.333.9383. Short term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours, while the net asset value (NAV) represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day.
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JEDI is distributed by Foreside Fund Services, LLC.