The defence sector is booming. Can investors still jump in?

The defence sector has been booming the past 18 months, driven by a peak in geopolitical conflicts and governments dedicating higher budgets to military and cyber security resources.

Global military expenditure hit £2.7 trillion in 2024, the highest level on record, according to data from HanETF. Investors who took up holdings in defence off the back of these movements have been well rewarded, with the most popular defence ETFs returning 14% on average in the past six months.  

Europe became an epicentre of this trend, with NATO members looking to close the near 12% defence spending gap it has with the US. Demand to cash in on this trend drove a wave of Europe focused products to come to market in quick succession, in particular active ETFs. Out of the top 10 most popular defence ETFs on the market now, just two have been around for more than three years.  

The fact that so many of the competitors in this space are new may ring some alarm bells for investors who are looking for long-term opportunities, rather than trending investments. But the players that have been around for a longer period have been able to prove strong track records over time. For example, iShares US Aerospace & Defense has returned 386.9% across the past 10 years. For perspective, the MSCI World has returned 249.6% in this same time.

Of course, different products in this space can perform very differently depending on what they hold, and there’s no guarantee they’ll perform the same way in the future.  

What do Defence ETFs really hold? 

Very few of ETFs that are labelled as defence explicitly invest in just ‘defence’ stocks, like Rheinmetall and Babcock, as this would be a relatively narrow pool of options.

Many have a broader view incorporating aerospace and more recently, cyber security assets as well.

Out of the top 10 biggest ETFs which focus on defence, none of them are made up of quite the same mix of companies.

For example, Rheinmetall and Babcock, two firms synonymous with the defence trend, are both listed in the top holdings for just one fund on this list, Amundi Stoxx Europe Defense ETF.

For some on the list, such as the £9.4 billion iShares U.S Aerospace & Defense ETF and £4.5 billion State Street SPDR S&P Aerospace & Defense ETF, neither Rheinmetall or Babcock are held in the top 10. This is because these particular ETFs can only hold US companies. For iShares and State Street, a company like US- based Lockheed Martin is more relevant.

But again, not all the funds you might expect to hold major US player Lockheed Martin hold it in their top 10, including HanETF Future of Defence. With 60 holdings and an ability to invest across global equities, this HanETF fund can be looked at as an example of how the defence trade has evolved.

Rather than investing more in armouries like the older funds in this space do, the HanETF Future option – which debuted in 2023 – backs companies generating revenue from cybersecurity operations alongside the ‘classic’ defence areas. It’s the only ETF in this list which has a top 10 stake in cybersecurity firm CrowdStrike, the company behind the now infamous ‘blue screen of death’ tech fault in 2024.

Cyber defence is a core part of national security and has the potential to be a major investment theme in the future as governments switch from a ‘boots on the ground’ defence to fighting computer-led attacks. This is partly down to the wealth of technological developments the world has seen in the past 30-years, which has been compounded by the widespread use AI.

Despite this range of ETFs capitalising on the same geopolitical events, the approaches they take towards investing in the sector can vary vastly. Considering what is part of your portfolio already, and what regions hold the largest exposures, may help investors determine what fund would be the right fit. However, because these funds focus on a specific sector of the market, it’s worth noting there’s more possibility for volatility. For example, a change in geopolitics could affect many of these companies in a similar way, creating big swings in a fund’s pricing. Diversifying assets to other parts of the market as well can help dilute this risk.