Perception can TRUMP reality for a long time in the global financial markets.
Geopolitical conflict in Ukraine have bolstered the performance and flows of defense thematic ETFs this year, with planned military spending a long-term tailwind.
Understanding the Defense Sector
Investing in defense stocks means gaining exposure to companies involved in military, aerospace, and defense technology. These companies benefit from government contracts, technological advancements, and geopolitical tensions driving military spending.
Market Dynamics and Investment Trends
Global financial markets can be influenced by perception more than reality for extended periods. As George Soros famously stated, “reading the mind of the market” is key to both making money and protecting capital.
Recent geopolitical conflicts have significantly bolstered the performance of defense stocks and thematic ETFs, with long-term increases in military spending serving as a tailwind. Since former U.S. President Donald Trump’s second inauguration, defense stocks have been a major investment theme, particularly as NATO members and EU countries assess the need for increased defense spending in response to the ongoing war in Ukraine.
European Defense Spending and Policy Shifts
Defense ETFs have attracted significant capital inflows, with over half of all thematic ETF flows in Europe over the past 12 months directed toward the defense sector. Thematic ETFs benefit from broad definitions, allowing index providers to tailor portfolios flexibly, which can make performance comparisons challenging.
With the U.S. reducing its support for Ukraine, European policymakers are urging increased military funding. European Commission President Ursula von der Leyen recently emphasized the urgent need to rearm Europe, calling for a surge in defense spending. On March 6th, the European Council is set to discuss a proposed €20 billion ($21 billion) military aid package for Ukraine and potential changes to EU fiscal rules to accommodate higher defense budgets.
Analyst Outlook and Market Reactions
The investment community is responding to these shifts. JP Morgan recently raised its price targets for defense stocks by an average of +25%, anticipating significant upward revisions in company earnings estimates and guidance. The bank expects continued sector re-rating as investors acknowledge strong growth potential in the global defense industry.
Key Risks to Consider
Regulatory & Political Risks – Defense budgets fluctuate with government policies and political shifts.
Cyclicality – Military spending patterns can be unpredictable, influenced by geopolitical stability.
Ethical Considerations – Many investors grapple with the morality of profiting from the military-industrial complex.
Moral Considerations of Investing in Defense Stocks
The morality of investing in defense stocks is a subjective issue, dependent on personal ethics and views on national security. Below are key arguments from both perspectives:
Arguments for Investing in Defense Stocks
National Security & Protection – Defense companies provide essential security and stability.
Job Creation & Economic Growth – The industry employs millions and fosters technological innovation.
Peace through Strength – A well-funded defense sector can act as a deterrent against conflicts.
Arguments Against Investing in Defense Stocks
Profiting from War – Some investors view military investments as contributing to global violence.
Arms Sales to Controversial Regimes – Defense firms often sell to governments with questionable human rights records.
Moral Responsibility for Harm – Investing in weapons manufacturers can be seen as an indirect endorsement of war.
Compromise: Ethical Defense Investments
For investors seeking a middle ground, some focus on companies developing cybersecurity, surveillance, and non-lethal defense technologies rather than lethal weaponry. ESG (Environmental, Social, and Governance) investing principles sometimes exclude traditional defense stocks but allow investment in non-offensive military technology.
Top European Defense ETFs
Several European ETFs offer exposure to the defense sector:
VanEck Defense UCITS ETF (DFNS) – Invests in companies involved in defense equipment manufacturing, cybersecurity, and contracting. Manages approximately $2.6 billion in assets (as of February 2025) with a 0.55% expense ratio.
Future of Defence UCITS ETF (NATO) – Focuses on companies generating revenue from NATO and allied defense spending. Launched in July 2024, managing over $235 million in assets within eight months.
Select STOXX Europe Aerospace & Defense ETF – Tracks major European defense companies, including Airbus, BAE Systems, and Rheinmetall.
Invesco Defence Innovation UCITS ETF – Specializes in companies developing advanced defense technologies. Benchmarked to Kensho, an S&P Global Indices subsidiary.
iShares U.S. Aerospace & Defense ETF (ITA) – While primarily U.S.-focused, this ETF provides indirect exposure to the European defense sector through multinational defense contractors.
Investment Considerations and Portfolio Alignment
When selecting a defense ETF or stock, investors should evaluate:
- Expense ratios and management fees
- Assets under management (AUM) to gauge fund stability
- Individual holdings to ensure alignment with investment objectives.
- Geopolitical developments that may impact defense budgets and stock performance.
Investing in the defense sector presents both financial opportunities and ethical dilemmas. Understanding the risks, market trends, and moral considerations can help investors make informed decisions aligned with their personal values and financial goals.
When investing in defense stocks & ETFs, investors should always consider total portfolio risk and portfolio allocation.
Rainer Michael Preiss, Partner & Portfolio Strategist at Das Family Office in Singapore
