The aerospace and defense trade is taking investors deeper into space and exchange-traded funds want a part of it.

VettaFi’s Cinthia Murphy told CNBC’s “ETF Edge” this week that there are now more ETFs tackling the space theme more directly — listing the Procure Space ETF (UFO) and Global X Defense Tech ETF (SHLD) as examples.

“They have the cybersecurity element: Satellites, communications, navigation. So, the defense theme is actually a very colorful theme nowadays. It has a lot of interesting names,” the firm’s director of research said. “It really isn’t just about Lockheed Martin and some of the traditional names that you find in ITA [iShares US Aerospace & Defense ETF].”

As of Thursday’s close, the Procure Space ETF is up almost 19% since the Iran War started on Feb. 28 while the Global X Defense Tech ETF is off 8%.

Meanwhile, the more traditional iShares US Aerospace & Defense ETF is down 10% in the same period. Its website lists the top holdings as GE Aerospace, RTX and Boeing.

Murphy expects investor interest in aerospace and defense stocks to persist long after the Iran war is resolved.

“Any time you have geopolitical heat, it puts this kind of theme on the map,” said Murphy. “But it’s another big growth area because there’s so much new technology coming up and so much investment coming into this space. A lot of governments are making commitments for much more investments in the next five to ten years.”

Murphy suggests historic interest in the SpaceX initial public offering, which is largely expected in June, is fueling even more interest in the space.

“One of the things we’ve spoken about the most this year is about space exploration and space investment given we’re about to see the SpaceX IPO,” added Murphy.

SS&C Technologies‘ Paul Baiocchi is also bullish on aerospace and defense names. He predicts a monster ramp-up in defense budgets around the world will generate solid returns for the group.

“All of these things are converging for the same limited scarce resources,” the financial technology firm’s head of fund sales and strategy said in the same interview. “Near-term, medium-term [and] long-term, commodities allocations, energy infrastructure [and] electrification infrastructure all stand to benefit from the massive amount of investment that’s coming from both the public and private sectors.”

Plus, he sees artificial intelligence playing a key role.

“The bottleneck for AI might be chips, but it’s also power and transmission and the raw materials that go into construction,” Baiocchi said. “If you look at defense, that’s also part of the constrain is the availability of the rare earths.”

The Iran war is redefining modern combat for the U.S. and driving demand for lower-cost tech.

It’s the exact situation Defense Secretary Pete Hegseth warned against a few months ago.

“We cannot afford to shoot down cheap drones with $2 million missiles,” Hegseth said in December. “And we ourselves must be able to field large quantities of capable attack drones.”

Two days into the war, the U.S. used up a reported $5.6 billion in munitions. Meanwhile, Iran has wreaked havoc on military bases, tourist centers and data centers used by America’s largest tech giants with swarms of low-cost Shahed drones that cost between $20,000 and $50,000, according to public estimates.

This is the moment defense tech and Silicon Valley have been waiting for. 

For years, defense tech has fought to prove itself in Washington and grab a chunk of the ballooning Pentagon budget snatched up by defense primes like Lockheed Martin, RTX and Northrop Grumman.

The war, coupled with President Donald Trump’s military reindustrialization efforts, could offer that long-awaited catalyst.

“The world is more dangerous,” said Mike Brown, partner at Shield Capital. “Technologies that were on the drawing board a decade ago have now proven themselves on the battlefield.”

The U.S. has deployed its own version of the Shahed in Iran called the Low-cost Uncrewed Combat Attack System, or LUCAS. The drone, built by Arizona-based SpektreWorks, costs about $35,000 per unit according to industry estimates.

The Department of Defense is also reportedly in the market to buy more.

Tara Murphy Dougherty, CEO of defense software startup Govini, said LUCAS is one of the only major new systems emerging in the Iran war, but production is modest. Most U.S. air capabilities in Iran have been with traditional fighter jets and bombers.

In counter-drone tech, Aerovironment this week announced the Locust X3 laser system, which the company claims will cost under $5 a shot. Contractors Lockheed Martin, RTX and Leidos also offer solutions.

Taser maker Axon entered the sector in 2024 with its Dedrone acquisition. Startups Anduril and Epirus are also scaling counter-drone warfare capabilities.

Despite their real-world applications, these tools accounted for only $4.7 billion of the fiscal 2026 budget. That’s according to data from Obviant, an intelligence startup that focuses on defense acquisition, contracting and budgeting data. 

“America was built on competition, so let’s be competitive,” said Brett Velicovich, co-founder of Powerus, a drone company backed by Trump’s sons. “Let the companies that have the best technology win, because it’s only beneficial to our country.”

Major defense tech winners so far include Oculus-creator Palmer Luckey’s Anduril and software AI company Palantir. Both recently signed multibillion-dollar-ceiling contracts with the Pentagon.

Palantir’s tools are already deeply ingrained in the DOD, and CEO Alex Karp alluded to the fact that the U.S. and its Middle East allies are using the company’s Maven platform.

The sector has seen a surge in popularity in Silicon Valley, with deal value nearly doubling to $49.9 billion last year from $27.3 billion in 2024, according to Pitchbook data. 

Despite that excitement, spending on the sector accounted for less than 1% of contract dollars in 2025, according to data from the Ronald Reagan Presidential Foundation and Institute. Anduril, Palantir and Elon Musk’s SpaceX account for 88% of that.

Trump’s signature $185 billion “Golden Dome” missile defense system will also provide new opportunities for startups, including shipbuilding and drone companies.

Several defense tech startups CNBC spoke with for this story said demand has skyrocketed from DOD customers since the U.S. and Israel first struck Iran at the end of February. Many of those customers have offered to buy out capacity or asked firms to ramp production, the businesses said. 

“We’ve had very clear demand signals coming out of this administration and the Pentagon,” said Ryan Tseng, president and co-founder of Shield AI, which hit a $12.7 billion valuation this week. “People are more ready than they ever have been.”

Gauging demand is a difficult task for any business, but particularly critical for firms reliant on venture funding to keep factories running. At the same time, the government hasn’t offered a steady enough flow of contracts to rationalize scaling for some of these businesses.  

That’s leaving defense tech firms divided over whether to hike capacity to win deals and risk profitability, or hold off and potentially miss opportunities. 

John Tenet, CEO of radar and communications tech maker Chaos Industries, said his manufacturing team is building day and night to meet customer demand signals. The company recently raised $510 million at a $4.5 billion valuation.

“If you’re waiting for the contract to scale production, you’re already too late,” he said.

Many of these businesses are already operating at a faster clip than in previous years. 

One counter-drone startup, which asked not to be named due to the nature of the company’s work with the government, told CNBC that this year it’s on track to double the number of systems created since it first launched its tool.

The startup said that all those systems have been sold to customers, and it would only increase capacity if given a contract by the U.S. government. 

That’s the tricky part of working with the government. 

Demand appears insatiable, but some defense firms told CNBC that they want contracts before shelling out on new systems. That’s even more critical for businesses building multi-million dollar tools with intricate supply chains.

Businesses could stockpile to get ahead of demand, but rapid innovation could quickly outpace their tech. That’s why focusing on a single product is a “very dangerous game,” said Accel partner Ben Quazzo.

“If you wake up one day and that’s obsolete, your business is in trouble,” Quazzo said.

The Pentagon plans to funnel billions over the next few years into defense technology, with Trump calling for a $1.5 trillion military budget in 2027. However, a budget managed by Congress with limited long-term visibility, coupled with a slow contracting process hindered by bureaucracy, creates some roadblocks.

“The Pentagon is the only company in the globe that is bound up by procurement and sales rules that somebody else is writing,” said Morgan Plummer, vice president of policy design and delivery at Americans for Responsible Innovation.

Even as tech companies ramp up production, experts said few of these tools are actually reaching battlefields abroad, and the production scale is far too low to cause a significant impact.

Hegseth’s acknowledgment of the drone-missile cost disparity came with a call for the industry to build 300,000 drones “quickly and inexpensively.”

The effort would deliver “hundreds of thousands of them by 2027,” Hegseth said.

Weeks after the first phase of the program started, the Iran war began.