Defence Investments Surge Amid Rising Global Tensions

Governments worldwide are ramping up defence spending as the US scales back military support for its allies. This shift is fuelling a surge in "defence funds" - ETFs focused on military and aerospace stocks- that have outperformed even traditional safe-haven assets like gold over the past six months. Investors are increasingly looking to these funds as military budgets in NATO countries rise, creating new opportunities in the market.

Defence ETFs provide a convenient way for investors to gain exposure to the growing defence sector. On the Australian Securities Exchange (ASX), specialist funds such as Betashares ARMR, Global X DTech, and VanEck DFND have gained around 20% year to date, surpassing gold’s 15% rise. Globally, these funds have attracted almost US$4 billion since the beginning of the year, while inflows in Australia have topped $100 million, with $40 million arriving since October.

Military spending increases are most pronounced in Europe, where key governments are boosting their budgets in response to geopolitical uncertainties. Germany is planning a major investment in defence to strengthen the European Union’s military capabilities, and the UK is following suit. NATO members are collectively shifting defence spending from around 2% of GDP to 3%, a significant adjustment that signals lasting changes in global security policies.

This surge in defence investments marks a substantial shift from the previous trend of ESG-focused investing, which prioritised environmental and social responsibility. The rise of military spending is pushing investors to reassess their portfolios as countries prioritise security. The ASX is responding by introducing new ETFs specialising in defence, illustrating shifting market dynamics. While Australia’s defence fund investments remain smaller compared to global counterparts, interest is growing rapidly

The world's largest defence fund, the iShares ITA Aerospace and Defence ETF, now holds US$6.3 billion in assets. Despite some variations in fund structures, companies like Lockheed Martin, Northrop Grumman, Germany’s Rheinmetall and defence-aligned tech firms such as Palantir are common holdings. This sector’s continued growth suggests that with increasing defence budgets, investor interest in these funds will likely remain strong.

Source: The Australian, Investopedia, GlobalXETFs