Defence investment has undergone a profound reassessment since Russia's full-scale invasion of Ukraine in February 2022. After decades of post-Cold War dividend — falling real defence budgets, asset reduction, and underspending against NATO's 2% of GDP commitment — the conflict in Ukraine, combined with a deteriorating geopolitical environment in Asia, has triggered one of the most significant periods of defence spending acceleration since the 1980s.
For investors, this has translated into exceptional returns from listed defence equities: the STOXX Europe Total Market Aerospace & Defence Index rose by over 60% in the two years to mid-2024. The investment question for 2025 and beyond is whether this is a cyclical rerating that has run its course or the early phase of a multi-year structural rearmament cycle.
The Rearmament Structural Case
NATO's 2% commitment was aspirational for most members throughout the 2010s. By 2024, 23 of 32 NATO members had met or exceeded the 2% threshold, compared with just six in 2021. Germany — historically the most budget-constrained major NATO member — established a €100 billion special defence fund in 2022 and committed to sustained 2%+ spending.
Europe's structural underspending. European defence forces have been dramatically hollowed out. Germany's Bundeswehr had approximately 345,000 active personnel in 1990; by 2024 this had fallen to approximately 180,000. Ammunition stocks across many European armies were considered alarmingly low following Ukraine deliveries. Rebuilding capability — vehicles, aircraft, missiles, command systems, personnel — requires multi-year procurement programmes that are now being initiated.
Beyond Europe. The Indo-Pacific security environment has driven significant defence spending increases in Japan (which has committed to doubling its defence budget as a percentage of GDP to 2% by 2027), South Korea, Australia, Poland, and across the Middle East. US defence spending, the world's largest, has continued to grow in absolute terms.
The technology dimension. Modern defence spending is increasingly oriented towards high-technology systems: drones, electronic warfare, cyber, satellite communications, missile defence, and autonomous vehicles. This creates a technology-defence convergence that brings some defence companies closer to aerospace technology firms in character.
UK and European Listed Defence Companies
BAE Systems (BA. — FTSE 100): the UK's largest defence company and one of the largest in the world. BAE is diversified across naval ships (destroyers, submarines), armoured vehicles, military aircraft (F-35 component manufacturer), electronic systems, and cyber. It operates in the UK, US, Australia, and Saudi Arabia. Its order book has expanded substantially since 2022.
Rolls-Royce Holdings (RR. — FTSE 100): primarily a civil aerospace engine maker (Trent series for wide-body jets) but with significant defence revenues through its military aero-engine and naval nuclear propulsion businesses. Rolls-Royce also has an SMR programme for nuclear energy. The 2023–2024 civil aviation recovery has been a major positive for the stock, alongside defence tailwinds.
Babcock International (BAB — FTSE 250): specialist in complex support services for defence — submarine maintenance, naval base operations, training, and nuclear services. More services-oriented than hardware-focused.
Rheinmetall (RHM — DAX, Germany): a German land systems and ammunition manufacturer that has been one of the most prominent beneficiaries of European rearmament. Rheinmetall makes artillery shells (demand has been extraordinary), Lynx infantry fighting vehicles, and a range of military electronics. The share price roughly tripled in 2022–2024.
Airbus (AIR — Euronext, France/Germany/Spain): primarily a civil aircraft manufacturer but with a substantial defence and space division covering military transport (A400M), helicopters (through Airbus Helicopters), military satellites, and defence electronics.
Leonardo (LDO — Borsa Italiana): Italian company with major positions in helicopters (AW139, AW101 widely used by governments), electronic warfare, radar, and satellite systems.
MBDA (private joint venture between Airbus, BAE, and Leonardo) — the European missile manufacturer — is not directly investable but creates indirect exposure through its parents.
US Defence: The Primes
The US market contains the world's largest defence companies. These are accessible to international investors through standard brokerage accounts (W-8BEN form for non-US individuals reduces withholding):
Lockheed Martin (LMT): the world's largest defence company. F-35 fighter (the largest defence contract in history), Javelin missile systems, C-130 transport, and a vast range of advanced systems.
RTX (formerly Raytheon Technologies): a merger of Raytheon (missiles and electronic warfare) and United Technologies (Pratt & Whitney aircraft engines, Collins Aerospace). Among the most diversified of the primes.
Northrop Grumman (NOC): B-21 Raider stealth bomber, space systems, and cyber.
General Dynamics (GD): Abrams tank, Virginia-class submarines, Gulfstream business jets, and IT services.
L3Harris Technologies (LHX): electronic warfare, communications, and sensors.
Defence ETFs
For diversified exposure:
iShares Global Aerospace & Defence UCITS ETF (DFND — London-listed): provides broad exposure to global defence and aerospace companies in UCITS format, accessible to UK and European investors. Includes both US primes and European companies.
HANetf Future of Defence UCITS ETF (NATO — London-listed): specifically focused on the NATO rearmament theme, with higher weights in European defence companies that benefit most from European rearmament.
Global X Defense Tech UCITS ETF: similar mandate with a technology focus within defence.
ESG Considerations
Defence is one of the most complex sectors for ESG-oriented investors. Conventional ESG frameworks exclude defence companies — weapons manufacturers are among the most commonly screened-out sectors in ESG funds. This has several implications:
Underweighting creates opportunity. If a large and growing pool of capital is systematically excluded from defence equities, valuations may be lower than fundamentals justify, creating potential outperformance for investors without ESG constraints.
ESG framework evolution. Several major ESG framework providers have begun distinguishing between conventional defence (considered essential for national security and democratic values — a social benefit) and controversial weapons (cluster munitions, anti-personnel mines, chemical weapons — widely excluded even by non-ESG investors). This evolution has opened some ESG funds to mainstream defence exposure.
The Sovereign Wealth Fund debate. Several European sovereign wealth funds have reduced or removed their defence exclusions since 2022. Norway's NBIM (the world's largest sovereign wealth fund) moved to allow investment in conventional defence following the Ukraine conflict. This is a significant indicator of shifting institutional norms.
Risks
Order book execution risk. Large defence programmes are chronically subject to cost overruns, schedule delays, and technical difficulties. A company with a full order book can still disappoint if programme execution is poor.
Budget dependence. Defence spending is subject to political decisions. A shift in government priorities, fiscal constraints, or a peace settlement in Ukraine could reduce spending growth.
Supply chain constraints. Ammunition production, in particular, has required rapid scale-up after years of low-volume production. Industrial base limitations constrain how fast spending increases can translate into deliveries.
Geopolitical escalation risk. Counterintuitively, actual conflict can be disruptive for defence supply chains and companies in affected regions.
The value of investments can fall as well as rise. Equity markets can be volatile. This guide is educational only and does not constitute investment advice. Seek professional advice appropriate to your situation.
How Global Investments Can Help
Defence equities have been among the most significant sector stories of the 2022–2026 period, and the structural rearmament cycle has years to run. Our investment team can help you assess the appropriate allocation, navigate the ESG considerations relevant to your mandate or personal values, and select between ETF and direct equity approaches. Contact us to discuss how defence might fit within your equity portfolio.
This guide is for general information only and does not constitute financial advice or a personal recommendation. The value of investments can fall as well as rise and you may get back less than you invest. Past performance is not a guide to future returns. Tax rules, investment regulations, and the availability of specific investment vehicles change — always verify current rules and seek advice from a qualified independent financial adviser before making any investment decisions.