The European Union is making a historic shift in defense spending, driven by reactions to the war between Russia and Ukraine and the increasing uncertainty about NATO’s future. President Donald Trump has signaled that the U.S may reduce or even withdraw its commitment to NATO, raising concerns about Europe’s security independence.
In response, the EU recently announced an €800 billion defense package, aimed at strengthening military capabilities after years of underinvestment. However, this should not be viewed as an act of an incoming war, but rather a strategic adjustment to modernise defenses and ensure self-sufficiency in an evolving geopolitical landscape.
How EU defense spending could impact markets
With every strong political shift such as this comes a commonly asked question: how will this impact the markets?
Defense & aerospace stocks set for surge?
With the EU committing €800 billion to defense investment, European defense and aerospace companies are positioned to benefit. Firms specialising in military equipment, cybersecurity and intelligence solutions are expected to see significant stock price growth as new government contracts roll out.
Infrastructure & energy investments
Beyond direct military spending, this re-arming movement could lead to greater investment in critical infrastructure and energy security. The EU may prioritise reducing reliance on foreign energy sources, leading to new projects in alternative energy and defense logistics.
The rise of defense ETFs: A trend to watch?
Defense Exchange-Traded Funds (ETFs) allow investors to gain exposure to companies in the defense and aerospace sectors, including those manufacturing military equipment, providing defensive services, and developing cybersecurity technologies.
The surge in EU defense spending has made defense ETFs a growing trend among institutional and retail investors. Military modernisation efforts, coupled with geopolitical uncertainties, have led many to view defense ETFs as a hedge against instability.
Specific defense ETFs to consider
There are specific defense ETFs that are showing promising signs and potential for value growth, for investors looking to tap into such opportunities.
VanEck Defense UCITS ETF (DFEN)
The VanEck Defense UCITS ETF tracks the MarketVector™ Global Defense Industry Index and provides exposure to global defense industry leaders. As of February 28, 2025, its top 10 holdings, including Thales SA (10.25%) and Leonardo SPA (9.34%), accounted for 66.04% of the fund, with the remaining 33.92% in other holdings and 0.04% in other/cash.
This ETF is traded on multiple exchanges, such as the London Stock Exchange and Deutsche Börse, in currencies such as USD, GBP, and EUR, offering flexibility for international investors.
Future of Defence UCITS ETF (NATO)
Issued by HANetf, the Future of Defence ETF targets companies benefiting from NATO and NATO+ ally defense and cyber defense spending. Its top holdings as of February 28, 2025, include Rheinmetall AG (6.59%), BAE Systems PLC (5.32%), Safran SA (5.07%), and Palantir Technologies (4.57%), with the top 10 accounting for 47.16% of the portfolio. It has significant regional exposure to the United States (56.90%), France (10.97%), and the United Kingdom (8.88%), and is listed on exchanges like LSE and Borsa Italiana.
This ETF offers an interesting blend of holdings, with companies such as Palantir Technologies and Safran SA, are involved in developing cutting-edge cybersecurity and data analytics solutions, addressing the growing need for robust cyber defense capabilities. This dual focus aligns with the evolving nature of defense spending, where traditional military hardware is complemented by investments in digital security, especially in response to state-sponsored cyber threats.
WisdomTree Europe Defence UCITS ETF (EUDF)
The WisdomTree Europe Defence UCITS ETF presents a unique opportunity for investors seeking exposure to Europe’s growing military and defense sector. This ETF tracks the WisdomTree Europe Defence Index, which focuses on leading European defense companies engaged in military technology, aerospace, and security solutions.
With holdings in Rheinmetall, BAE Systems, Leonardo, and Saab, the fund provides diversified exposure to key players poised to benefit from increased European defense budgets.
Risks and considerations for investors
While defense ETFs are a compelling investment opportunity worth watching, investors must also consider the relative risks that come with them, just like any other investment options.
- Concentration risks – Defense ETFs are heavily invested in a specific sector, making them vulnerable to any potential downturns. As an example, a reduction in defense budgets due to political changes could impact the value of such ETFs.
- Geopolitical risks – Changes in the geopolitical landscape such as resolution of conflicts could lead to decreased defense spending, and potentially decreased returns from defense ETFs.
- Market volatility – Stock prices of defense companies can be highly volatile, due to influences by government contracts, budget allocations, and economic conditions.
- Currency risks – For international ETFs, exchange rates fluctuation may both positively and negatively impact investment returns.
Should investors consider defense ETFs?
The current geopolitical scene and the European Union’s recently announced €800 billion defense package make defense ETFs a compelling investment opportunity for those seeking long-term stability and growth, and a broad market exposure investing in several global companies.
As Europe repositions itself in the global security landscape, investors should watch how this trend unfolds and consider defense ETFs to capitalise on this transformation.
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