U.S. Stock Market Style Rotation: From Tech to Defense
The U.S. stock market is undergoing a significant style shift. The rally once led by tech stocks is gradually fading, giving way to a preference for defensive assets. Data shows that out of the top ten active U.S.-based ETFs by return, nine are heavily weighted in defense-related companies or precious metal mining stocks, becoming the new market focus.
Todd Rosenbluth, head of research at Vetta Fi, pointed out that geopolitical uncertainties and intensifying international conflicts are driving funds toward more risk-resistant assets. He said, "Whether it’s Ukraine, Gaza, or tensions in the Asia-Pacific region, market participants are more inclined to invest in ETFs with resilience to shocks."
The Rise of Defense and Gold Sectors
Looking at specific products, the selected iShares STOXX Europe Aerospace & Defense ETF (Ticker: ESAD) leads with over a 65% year-to-date return, far exceeding other categories. The ETF’s top holding is Germany's defense giant Rheinmetall, which constitutes 14.1% of its portfolio, and whose stock has surged 268% over the past 12 months. Analysts expect its earnings per share this year to approach $34.03, a nearly 70% increase.
Following this are the Sprott Gold Miners ETF and the VanEck Junior Gold Miners ETF, with returns of 62% and 56% respectively. The top holding of the Sprott ETF is Newmont Corporation, making up 12.4%. Its EPS for the first quarter of 2025 was $1.25, far exceeding market expectations, with a projected annual EPS growth of up to 26%.
Apart from the defensive ETFs mentioned above, the only non-defense or precious metal sector product in the top ten is the Global X Video Games and Esports ETF, with a year-to-date return of 38%. However, the overall trend indicates that defensive assets are increasingly dominating.
Gold Market Strong but Uncertain
Although gold ETFs are performing strongly, the market is not without concerns. Analyst Cinthia Murphy pointed out that inflation volatility, global central bank policies, and miners' cost control capabilities are causing some investors to hesitate about the continuous rise of gold.
"Without a significant cooling in the global economy, gold prices still have upward potential, but if cost pressures increase or risk appetite recovers, the appeal of gold ETFs may diminish," Murphy said.
She added that gold, as a safe-haven asset, is heavily influenced by macro events, and any signals of a stronger dollar or rising interest rates could have an impact. Moreover, the profitability and operational efficiency of mining companies will be key variables in the second half of the year.
ETF Investors Should Beware of Sector Rotation Risks
Despite the current bullish trend for defense and gold ETFs, institutional analysts are reminding investors that market style rotations are often difficult to sustain. Rosenbluth stated that if inflation stabilizes or political tensions ease in the future, market focus might shift back to growth assets like tech stocks.
In the short term, however, with global situations still unclear and no definitive shift in Federal Reserve policy, defensive ETFs are expected to maintain high popularity, remaining a preferred option for continuous fund allocation.
