Defence spending is rising across the developed world at a pace not seen since the Cold War. The geopolitical shocks of the past three years — Russian aggression in Ukraine, deteriorating relations with China, and the reassertion of US strategic priorities — have forced European governments to reckon with decades of underinvestment in military capability. For investors, this creates a structural tailwind for defence and aerospace equities that is likely to persist for years.
This is not a simple story, however. ESG screening has made defence one of the more controversial sectors in contemporary investment portfolios. Regulatory classification under the EU's SFDR framework creates complications for funds with sustainability mandates. And valuations have already moved significantly: the sector re-rated sharply following the February 2022 invasion of Ukraine, meaning that forward returns may be more modest than the headlines suggest.
This guide sets out the investment case, key companies, accessible vehicles, and the considerations that thoughtful investors need to weigh.
The NATO Spending Backdrop
At the 2014 Wales Summit, NATO members committed to spending 2% of GDP on defence. In 2022, only a handful of members met this target. By 2026, the picture has shifted materially. Germany, which spent less than 1.5% of GDP on defence as recently as 2021, has committed a special fund of €100 billion for military modernisation and targets exceeding 2% of GDP. Poland is already spending above 3%. France has a multi-year defence budget trajectory that takes it to and above 2%. The UK has committed to reaching 2.5% of GDP by 2027.
The gap between current capability and stated requirements is vast. European NATO members need to replenish munitions stocks depleted by support for Ukraine, invest in air defence, upgrade ground forces, modernise naval fleets, and develop cyber and space capabilities. Order books for the major European prime contractors have grown dramatically: BAE Systems, Rheinmetall, Thales, and Leonardo all report multi-year order backlogs.
Key Companies: European Focus
BAE Systems (LSE: BA.) is the UK's largest defence contractor and one of Europe's most diversified. Its exposure spans combat vehicles, submarines, electronics, and cyber capabilities. Revenue in 2025 exceeded £30 billion. BAE benefits directly from UK MoD budget increases and from US defence contracts via its North American subsidiaries.
Rheinmetall (XETRA: RHM) is Germany's leading defence industrial company, with strong positions in ammunition, vehicles, and air defence systems. Its order book has grown explosively since 2022 and the company has signed major contracts across Europe. The stock has been one of the best-performing large-cap European equities over 2022–2025.
Thales (EURONEXT: HO) is France's diversified defence and technology group, with significant exposure to airborne systems, ground-based air defence, radar, and naval electronics. It also has a large civilian technology business, which provides some ballast to the defence cycle.
Rolls-Royce (LSE: RR.) sits at the intersection of defence and aerospace. Its defence division powers military aircraft including the Eurofighter Typhoon. The company is often grouped with defence primes, though its civil aerospace recovery story has dominated investor attention in recent years.
US Dominance: The Larger Opportunity
European defence companies are the most directly exposed to European rearmament, but the US continues to dominate the global defence market. Lockheed Martin, RTX Corporation (formerly Raytheon Technologies), Northrop Grumman, and L3Harris Technologies collectively account for a disproportionate share of global defence revenue. US allies purchasing US-made platforms — notably the F-35 fighter — generate revenues that flow to American primes, not European ones.
UK-listed investors can access US defence via a range of global or US-focused funds, or directly through overseas account wrappers. Many broad global defence ETFs hold a majority of US names.
ETF Options for UK Investors
For investors who want sector exposure without single-stock selection risk, several ETFs are worth considering.
VanEck Defense UCITS ETF (ticker: DFNS on Euronext Amsterdam; available on some UK platforms) is a pure-play defence ETF tracking the MarketVector Global Defense Industry Index. It holds a mix of US and European primes and has grown rapidly in AUM since launch. TER is approximately 0.55%.
Global X Defense Tech UCITS ETF provides a similar mandate, with exposure across pure-play and dual-use technology companies serving the defence sector.
It is worth noting that broad ESG ETFs will typically exclude or significantly underweight defence companies. iShares MSCI Europe ex-UK ESG Screened ETF and similar products explicitly screen out weapons manufacturers, which can mean eliminating companies like BAE Systems or Rheinmetall from European portfolios entirely. Investors with sustainability mandates should check the screening criteria of their current funds to understand their existing exposure — or lack thereof.
The ESG Complication
This is perhaps the most live tension in defence sector investing. Article 8 and Article 9 funds under the EU's Sustainable Finance Disclosure Regulation (SFDR) face pressure — in some cases explicit prohibitions — around allocating to conventional weapons manufacturers. Many large institutional asset allocators have ESG policies that restrict or prohibit defence sector holdings.
The counter-argument — gaining traction among European policymakers and some asset managers — is that a robust defence industry is a prerequisite for the security and stability that enables sustainable investment to function at all. Germany's €100 billion special fund included discussion of whether defence spending should be treated as "sustainable" under EU taxonomy rules. As of 2026, no consensus has been reached, but the debate is live and the direction of travel appears to be towards a more nuanced treatment of defence.
For HNW individual investors, ESG policy constraints are personal rather than regulatory. Some investors explicitly want to exclude defence on ethical grounds; others take the view that defence manufacturing is a legitimate and necessary economic activity. This is a values question rather than a financial one, and this article does not advocate for either position.
Dual-Use Technology
An important adjacent theme is dual-use technology — systems developed for defence that have civilian applications, or vice versa. Satellite communications, cybersecurity, autonomous systems, and advanced semiconductors all sit at this intersection. Companies such as Palantir Technologies, Leonardo DRS, and a range of smaller technology firms derive revenue from both defence contracts and commercial clients.
The dual-use angle is increasingly important as military capability becomes more software- and data-intensive. It also creates interesting portfolio construction options for investors who are willing to hold partial defence exposure through a technology lens.
Risks and Valuation Considerations
The risk most specific to defence sector investment is policy reversal. Defence budgets are ultimately political decisions. A change of government, a diplomatic breakthrough, or fiscal pressures could slow the planned trajectory of spending. European governments also have a history of announcing defence commitments and then finding reasons to delay implementation.
Valuation is the other key consideration. Many European defence stocks re-rated sharply in 2022–2023 and again in 2024–2025. Rheinmetall, for example, traded at a single-digit PE in 2021 and at a premium multiple by 2025. Investors entering now are not buying an unloved sector at distressed valuations; they are paying for a growth story that is already partially priced in.
Execution risk is meaningful: defence contracts are long, complex, and frequently subject to delay, cost overruns, and political interference. Programme delays at major platforms have caught investors off guard before.
As with all investments, values can fall as well as rise. This article does not constitute investment advice. Tax treatment will vary with individual circumstances.
How Global Investments Can Help
Our team helps internationally mobile HNW investors navigate sector-level investment decisions, including sectors with complex ESG, regulatory, and valuation dynamics such as defence. We can help you assess whether defence exposure fits your portfolio objectives, identify appropriate vehicles given your tax residency and account structure, and integrate this allocation into a coherent broader strategy.
Contact our advisory team to discuss your portfolio and investment outlook.
This article is for general information only and does not constitute financial, legal or tax advice. Rules, prices and regulations change; verify current requirements with a qualified adviser before acting.