How to Invest in Defense Stocks

In Europe, the defense sector has long taken a back seat. But with the upswing in geopolitical tensions, the defense industry is rapidly gaining importance – and shedding its previous unpopularity.

This moneyland.ch guide answers the most important things to consider when investing in defense stocks.

What is the defense sector?

The defense sector is made up of all companies involved in the development and manufacturing of equipment for the military. Examples include:

• Weapons and weapons systems
• Ammunition
• Protective clothing
• Software used in security and analysis
• Navigation technology

Governments are typically the biggest customers for the defense industry’s products and services, but there is also some demand from private companies.

What makes the defense sector interesting for investors?

After spending decades in the shadows, the European defense sector has rapidly gained importance in recent years. Geropolitical tensions like the conflict between Russia and Ukraine have driven many countries to invest heavily in their militaries, with positive results for arms manufacturers. The defense sector is now one of the most important growth markets in Europe, which has otherwise had somewhat stunted economic growth in recent years.

The costly investments in defense have driven massive growth of many defense stocks. German arms manufacturer Rheinmetal is a prime example: the value of its stock in September 2025 was more than 20 times higher now than it was at the start of 2022.

Which stock indexes track the defense sector?

There are numerous stock indexes that focus either entirely or largely on the global defense sector. These indexes are made up primarily of US and Western European stocks, with US stocks playing a dominant role. But defense companies in Israel, Canada, Singapore, and South Korea are also found in the indexes.

There are also many stock indexes that focus completely on European defense stocks. These indexes are primarily interesting for investors who want to exclude US stocks from their investments. The Vettafi Future of Defence Ex US Index is an exception. Although it is not a purely European index, more than 90 percent of the companies tracked by the index are domiciled in European countries.

Which ETFs can I use to invest in defense stocks?

There are exchange-traded funds (ETFs) that you can use to invest in an entire defense stock index instead of buying each stock individually. You can buy and sell shares in an ETF using a stockbroker.

It is important to understand the costs that may apply to investing. The brokerage fees and custody fees for trading and holding stocks vary between stockbrokers. If you use an ETF to invest, then you also have to pay the ETF’s fee, which is shown as the total expense ratio (TER). You can find more useful information in the checklist for choosing the right ETF.

The indexes shown above also have ETFs that replicate them, and you can use these ETFs to invest in the corresponding defense stock index. The funds are generally young, with most of these defense ETFs having been established within the last two years. 

There are also ETFs that replicate the European defense stock indexes, in case you want to limit your defense investments to European stocks.

What are the disadvantages and risks of investing in defense stocks?

Investing in defense stocks comes with a number of risks and disadvantages that you should be aware of before you invest:

• Poor diversification: Investing a disproportionately large part of your wealth in defense stocks can result in a poorly-diversified investment portfolio. That is especially true when you invest in just a few select defense stocks. But even defense ETFs that hold numerous defense stocks are still poorly diversified, as they only invest in a single industry sector. Defense ETFs also invest in a relatively small number of different companies. All of these companies depend on heavy defense spending to fill their order books, and defense spending can quickly dry up in times of peace.
• The US is overweighted: Global defense indexes are dominated by US defense companies, with the US component exceeding 50 percent across all of these indexes as per September 2025. That creates a geographical concentration risk.
• The risk of overvaluation: Increased military spending can quickly drive up the value of defense stocks. But defense stocks can rapidly lose value if and when the hype dies down. 
• Ethical concerns: Many people find investing in the arms industry to be morally questionable.

Is investing in defense stocks ethically reconcilable?

Whether or not you consider investing in defense stocks to be ethically sound depends on your personal values.

While the defense sector was broadly frowned upon just a few years ago, there has been a rapid turnaround in public opinion – largely as a result of the conflict in Ukraine. Surveys have shown that acceptance of weapons manufacturers is growing across Europe. But in spite of this shift, the defense industry still has a questionable reputation in many circles. Traditionally, defense stocks have been widely categorized as sin stocks.

How profitable are defense investments?

A comparison of two global defense ETFs against the MSCI World global stock index makes the established global index look like a poor performer. The defense ETFs greatly outperformed the MSCI World over the one and two years (Refer to the graphic).

It is interesting to see that, over the relatively short timeframe, the Van Eck Defense UCITS ETF performed disproportionately well compared to the iShares Global Aerospace & Defence UCITS ETF USD (Acc). The difference in performance is 30 percentage points.

But it is important to relativize the comparison results. The timeframes used for the comparison only provide a snapshot of performance. ETFs are most useful for long-term investing. Because the defense ETFs in the comparison are very young, the value of their historical performance is very limited.

Because data is limited, it is important not to read too much into this performance comparison. Be aware that performance can differ hugely depending on which timeframe is used. There is always a risk of losing money when you invest in the stock market.

Disclaimer: This article is published for informative purposes only, and should not be considered as investment advice. The publisher does not accept any liability in connection with this publication.

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