According to The Washington Post, Defense Secretary Pete Hegseth has proposed an 8% reduction in projected U.S. military spending over the next five years. If adopted, this move would be the largest effort to reduce Pentagon spending since 2013.
The proposed budget cut is aimed at curbing unnecessary defense expenditures and eliminating excessive bureaucracy. The Defense Secretary pointed to the U.S. national debt, which has surpassed $36 trillion, highlighting the economy’s financially constrained environment, as quoted on the Post.
Per the Post, initial reactions to the budget cut plan included a mix of skepticism and alarm, with expectations of internal resistance and strong bipartisan opposition in Congress.
Breaking Down the Budget Cut
The proposed cuts are set to begin in 2026, with 17 categories such as southwest border enforcement, one-way attack drones, nuclear weapons and missile defense modernization exempted by the Trump administration.
According to the Pentagon, as quoted on CNBCTV18, approximately $50 billion will be trimmed from the planned 2026 budget but will be reallocated to programs that align with President Trump’s priorities rather than being entirely lost from military funding.
The Pentagon's budget for 2025 is approximately $850 billion, and according to the Post, if the budget is fully implemented, the cuts would amount to tens of billions of dollars annually over the next five years.
The budget directive comes alongside a separate order from the Trump administration, calling for thousands of probationary Defense Department employees expected to be dismissed, which is being overseen by Elon Musk’s U.S. DOGE Service.
Per Forbes, President Trump has sent mixed signals on defense spending since resuming office. As reported by CNBC last week and quoted on Forbes, Trump suggested that the military budget could be slashed to half in the future. On the other hand, in an interview with Fox News, Trump stated that he wants to increase defense spending, Forbes reported.
Trump and NATO
The cuts come as Trump urges NATO allies to boost defense spending to 5% of GDP, a significant increase for nearly every member nation, per CNN.
With Russia-Ukraine talks progressing and Defense Secretary Hegseth hinting at a possible withdrawal of U.S. troops from Europe, according to The New Yorker, NATO allies and European economies may ramp up military investments. This shift could offer some relief to the funds as global defense spending rises.
ETFs to Consider
While overall military funding will be reduced, it will stay within the defense sector, redirected toward more focused and strategic priorities. Rather than simply cutting spending in a way that weakens military strength, the Trump administration is trying to eliminate unnecessary expenses, refocusing funds toward Trump's national defense priorities.
However, the uncertainty surrounding the proposed cuts and whether the Trump administration will follow through could create volatility for the funds listed below, potentially leading to declines.
iShares U.S. Aerospace & Defense ETF (ITA)
iShares U.S. Aerospace & Defense ETF seeks to track the performance of Dow Jones U.S. Select Aerospace & Defense Index with a basket of 35 securities. The fund has amassed an asset base of $6.5 billion and charges an annual fee of 0.40%.
iShares U.S. Aerospace & Defense ETF has declined about 3.4% since late January (as of Feb. 20).
Invesco Aerospace & Defense ETF (PPA)
Invesco Aerospace & Defense ETF seeks to track the performance of SPADE Defense Index with a basket of 54 securities. The fund has gathered an asset base of $4.75 billion and charges an annual fee of 0.57%.
Invesco Aerospace & Defense ETF has declined about 5.4% since late January (as of Feb. 20).
SPDR S&P Aerospace & Defense ETF (XAR)
SPDR S&P Aerospace & Defense ETF seeks to track the performance of the S&P Aerospace & Defense Select Industry Index, with a basket of 34 securities. The fund has gathered an asset base of $2.81 billion and charges an annual fee of 0.35%.
SPDR S&P Aerospace & Defense ETF has declined about 7.2% since late January (as of Feb. 20).
Global X Defense Tech ETF (SHLD)
Global X Defense Tech ETF seeks to track the performance of Global X Defense Tech Index with a basket of 37 securities. The fund has gathered an asset base of $861.1 million and charges an annual fee of 0.50%.
Global X Defense Tech ETF has gained about 4.2% since late January (as of Feb. 20).
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Global X Defense Tech ETF (SHLD): ETF Research Reports
iShares U.S. Aerospace & Defense ETF (ITA): ETF Research Reports
Invesco Aerospace & Defense ETF (PPA): ETF Research Reports
SPDR S&P Aerospace & Defense ETF (XAR): ETF Research Reports
This article originally published on Zacks Investment Research (zacks.com).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
