For many years, the investment landscape for publicly traded defense stocks has been relatively narrow, despite the SPADE Defense Index delivering an annual return of nearly 17% over the past 15 years.
Many institutional and professional investors have historically avoided the defense sector, either due to ethical concerns or because they viewed it as too specialized. However, this perception has started to shift.
Despite the defense sector being smaller than technology, semiconductors, and other major industries, the last year has seen a substantial increase in capital flowing into defense stocks and the funds that invest in them. The number of exchange-traded funds (ETFs) focusing on defense has expanded dramatically, from just four in 2022 to 27 now, with the managed assets in these funds increasing ninefold to over $35 billion.
Changing Perspectives on Defense Investments
The defense industry is witnessing a significant transformation in how investors view its prospects. Increased government defense spending has boosted the performance of publicly traded defense companies, leading to considerable returns in recent years.
According to the Stockholm International Peace Research Institute, global defense expenditure in 2024 soared to a new high of $2.718 trillion, marking a 9.4% increase—the largest since the end of the Cold War. This uptick is driven by heightened spending from European countries, Russia, and the Middle East, with defense budgets growing consistently over the past decade.
Russia, for instance, has upped its defense spending by 38% to approximately $149 billion, accounting for 7.1% of its GDP and 19% of its total government expenditure. In contrast, Ukraine’s defense spending stands at $64.7 billion, which is 34% of its GDP, the highest ratio globally.
While historical data provides a point of reference, future-focused investment strategies are crucial. As of early 2025, there seemed a possibility that conflicts involving Russia and Ukraine, as well as Israel and various regional terrorist groups, might de-escalate within the year. However, these hopes were premature.
Russian aggression towards Ukraine has intensified, ceasefire talks have stalled, and Israel has initiated new operations to counteract terrorist threats. Meanwhile, the Houthis continue to attack commercial and Western-aligned targets, and tensions involving North Korea and Iran persist, with India and Pakistan also experiencing military skirmishes.
Rising Geopolitical Tensions and Defense Spending
The 2020s have been marked by significant geopolitical tensions, reminiscent of the Cold War era.
European nations have notably increased their defense budgets in response to threats along their eastern borders. The fall of the Soviet Union once heralded a “peace dividend” for Europe, but recent developments have necessitated a robust defense posture to deter potential Russian aggression and lessen reliance on the U.S. The European Commission has proposed several initiatives, including a €800 billion program over four years for security measures, as well as policies to boost EU defense production capabilities.
Countries bordering Russia, like Germany and Poland, have also significantly raised their defense budgets. Germany’s defense spending increased by 28% in 2024 to $88.5 billion, while Poland’s grew by 31% to $38 billion.
As the U.S. appears to step back from its longstanding global security leadership role, European nations are taking independent steps. Germany has deployed troops abroad for the first time since WWII, Lithuania is fortifying its defenses against potential Russian advances, and Finland is enhancing border security.
Investment Opportunities Amidst European Defense Initiatives
The shift in European defense priorities has led to the launch of over a dozen Europe-focused ETFs in recent months, attracting nearly $15 billion in assets. The stock prices of many European defense companies have seen substantial growth, with companies like Rheinmetall experiencing a surge in their market value.
While the U.S. continues to hold a dominant position in the global military market with a nearly $1 trillion defense budget, European nations are increasingly asserting their autonomy in defense matters. This includes establishing new partnerships and integrating more deeply with the European aerospace and defense ecosystem.
Moreover, the imposition of U.S. tariffs could further complicate the global supply chain, affecting the defense sector’s ability to meet rising demand.
Defense News’ Top 100 list includes 70 publicly traded companies, accounting for about 77% of the total FY24 global defense revenues of $661.1 billion. Excluding Chinese firms, public companies represent 90% of these revenues.
The defense sector, while not massive, has significant growth potential. Globally, military activities account for about 2.5% of GDP. With ongoing global threats, investment in defense continues to climb, fueled by advances in technology such as artificial intelligence and unmanned vehicles, which are reshaping modern warfare.
Since the onset of the Russia-Ukraine conflict, the SPADE Defense Index has seen a remarkable 90% increase, outperforming the U.S. stock market and demonstrating the resilience and potential profitability of defense sector investments during both stable and turbulent times.
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Jamal Peterson reports on defense, aerospace, and tech policy. With a military background and a strategic mind, he dissects complex subjects with clarity, offering readers sharp, reliable insights.
