Defence ETFs – The New Kids on the Block
Since the end of the Second World War, Western European countries have no longer been confronted with military conflicts on their soil and have enjoyed increasing economic growth and general prosperity. This so-called peace dividend is based on trusting cooperation between states on a political and economic level. In addition to the political and economic solidarity, the countries of Western Europe also built their defence community, NATO (North Atlantic Treaty Organization), to maintain peace. This long period of peace prompted the heads of state and government of these countries to reduce their defence spending even though the NATO agreement requires them to spend at least 2.0% of their GDP on defence. The lack of investment in their defence made European countries vulnerable for any armed conflict on their home ground and therefore increasingly dependent on the U.S. over time.
With the outbreak of war in Ukraine in February 2022, many European countries realized that there was a real possibility of war in Europe. In the context of the promised military aid for Ukraine, it became clear that although many countries were prepared to support Ukraine, they were unable to keep their promises due to a lack of the necessary equipment.
This situation led some European countries to increase their defence budgets in order to provide the promised military aid and at the same time maintain their ability to defend themselves. As a result of this increased defence spending, investors began to buy shares in defence companies which led to corresponding price increases. With this emerging trend, the investment industry began to develop initial products and place them on the market over time.
Since the ETF industry has always been very innovative with the launch of new products, it was no surprise to see that the first defence-themed products available for sales in Europe were ETFs. While the first spree of defence-themed ETFs launched between July 3, 2023, and October 29, 2024, were investing in stocks which may profit from the increase in defence spending globally, the next round of product launches were defence-themed ETFs with a focus on stocks which may profit from the increase in defence spending in Europe.
With the new spending goal of 5.0% of the GDP, which includes defence-related infrastructure spending, NATO members set the stage for new investment products during the NATO meeting on June 25, 2025. Since the new spending goal will possibly have large effects on the balance sheets of companies which are producing weapons and military infrastructure or equipment.
When it comes to this, defence-themed investment products now have an even more solid investment case than ever before. That said, even as NATO members have agreed to more than double their annual defence spending by the year 2035, it needs to be seen if the respective actions are really taken, as the past proved that defence spending is one of the positions that get slashed in annual budgets if a government needs the money to fulfil the promises they made during their election campaigns.
This means that the general defence spending might be much lower than expected, which in turn will negatively impact the earnings of defence-related companies and therefore also the investment case for defence ETFs, since this will impact the expected returns negatively.
Assets Under Management of Defence ETFs
As chart 1 shows, the investment theme defence has gathered some interest from investors in Europe. This seems to be especially true since the beginning of the year 2025, since U.S. president Donald Trump made clear that any future engagement of the U.S. in NATO would be dependent on increased defence spending by all NATO members, as most members did not reach the defence spending target of 2.0% of GDP. Roughly at the same time, the newly elected German government launched an initiative for increased military spending which should not fall under the measures of the German debt break.
In more detail, the assets under management of defence ETFs increased from €863.4 million on December 31, 2024, to €5,293.6 million on May 31, 2025.
Graph 1: Assets Under Management in Defence ETFs Registered for Sales in Europe, June 30, 2023 – May 31, 2025 (in million EUR)
Source: LSEG Lipper
As graph 3 shows, the growth in assets under management was driven by strong inflows in defence ETFs. That said, these flows were mainly concentrated in the largest defence ETFs registered for sale in Europe.
With regard to this, graph 2 shows that the segment of defence ETFs is dominated by two products. While the largest defence ETF in Europe, the WisdomTree Europe Defence UCITS ETF EUR Acc (AUM €2,182.9 m) was only launched in April 2025, the second largest ETF in Europe, Future of Defence UCITS ETF Acc (AUM €2,100.2 m), was the first defence ETF in Europe launched on July 3, 2023. In addition to this, it is noteworthy to bear in mind that the WisdomTree Europe Defence UCITS ETF EUR Acc is focusing on Europe, while the Future of Defence UCITS ETF Acc is investing globally in defence stocks, including cybersecurity.
Graph 2: Assets Under Management by ETF, May 31, 2025 (in million EURO)
Source: LSEG Lipper
Estimated Net Flows in Defence ETFs in Europe
As the topic of defence became part of broader discussions between political decisionmakers, as well as the public, the interest in defence ETFs increased.
Chart 3 shows that defence ETFs enjoyed inflows in every single month since the introduction of the first product in July 2023.
Graph 3: Monthly Estimated Net Sales of Defence ETFs in Europe June 30, 2023 – May 31, 2025 (in Euro millions)
Source: LSEG Lipper
Nevertheless, the inflows into defence ETFs are highly concentrated since only two products were so far able to gather assets under management of more than €1.0 bn.
Chart 4 shows the dominance of the WisdomTree Europe Defence UCITS ETF EUR Acc and the Future of Defence UCITS ETF Acc with regard to the overall estimated net flows in defence ETFs.
Graph 4: Monthly Estimated Net Sales of Defence ETFs in Europe June 30, 2023 – May 31, 2025 (in Euro millions)
Source: LSEG Lipper
While the Future of Defence UCITS ETF Acc may take profit from the so-called first mover advantage since it is the oldest product available in Europe, the WisdomTree Europe Defence UCITS ETF EUR Acc may profit from its very low TER (0.15%) since European investors seem to be cost cautious. That said, the TER should only be considered as second or third criteria in a proper ETF/fund selection process since it is more important that the respective investment vehicle suits the needs and expectations of the investor rather than just be the cheapest available product. If there are like-for-like products, an investor might prefer the product with the lower TER.
A View on the Asset Allocations of Defence ETFs
In order to examine the structure of the defence ETFs registered for sales in Europe one needs to build peer groups of the available products based on their geographical focus to conduct a meaningful analysis. This kind of classification could be made even more meaningful if one would also look at the investment theme underneath the main theme of defence since some ETFs include defence against cyberattacks, while others may have a broader approach to the main investment theme and include companies from a whole sector such as aerospace.
Graph 5: Asset Allocation by Country (in %) – Global Defence ETFs
Source: LSEG Lipper
As graph 5 shows, the U.S. is the country with the highest weighting in the portfolios of global defence ETFs. That said the weighting of the U.S. is varying massively from one ETF to another. The average weighting of the U.S. in global defence ETFs is 82.59%. That said, the lowest weighting is 50.39%, while the highest weighting of the U.S. is 72.10%. The same is true for all other countries. Since the allocation to various countries and currencies is impacting the performance of the respective ETF, investors need to analyze the strategy of defence ETFs and the resulting portfolios quite carefully to find an ETF which really suits their needs.
As graph 6 shows, the pattern for defence ETFs investing globally is also true for defence ETFs investing in Europe. Even as the investment universe is smaller than for their global peers, the weightings of the different countries can still vary massively.
Graph 6: Asset Allocation by Country (in %) – European Defence ETFs
Source: LSEG Lipper
Generally speaking, one would expect that asset allocation at the country level will vary from one ETF to another since there are only a few very large players in the defence industry. This means the different country weightings reflect the allocation to the stocks with the highest weighting within the ETF portfolio. Hence, the different weightings are a result of the different investment strategies of the different ETFs. This also means that the results of a single defence ETF may vary widely over time, even if the respective ETFs are investing in the same theme.
As a consequence, investors who want to participate in possible gains from higher defence spending of the NATO members need to research the products very carefully to ensure they will invest in an ETF that really suits their needs and invests in line with their expectations to avoid any disappointment. This also means that the overall performance of the products might not be a relevant measure in the first stage of ETF selection.
Total Expense Ratios of Defence ETFs
The Total Expense Ratio (TER) represents the costs an investor has to bear for the management of a mutual fund or ETF. The TER should not be mixed up with the total cost of ownership because this also takes trading and cost related to the ownership of an ETF or mutual fund into account.
Generally speaking, it is normal that the average TER of defence ETFs is above the average TER of all equity ETFs registered for sale in Europe, since the providers of the underlying indices charge the ETF promoters a higher fee compared to plain vanilla indices. This is due to the higher costs for research and index development since the index provider needs to build an investment universe based on the respective investment theme. This requires in-depth analysis of balance sheets and revenue streams to identify companies which might be eligible to be included in the respective themed index.
It is considered as normal that the first mover in the segment of defence ETFs charges an above average TER since there is no reference price point in the market and the promoter wants to generate an income stream from the management fees that compensates for the management, marketing and sales efforts of a new product. After the first product has been established, promoters who follow with further products have a price point and can offer their product with a lower TER since the TER can be a competitive edge for the distribution of like-for-like products. When it comes to this, it is not surprising that the TERs of defence ETFs are getting lower over time.
To visualize this, graph 7 below is sorted by the launch date of the respective ETF (the oldest ETF on the left and newest on the right).
Graph 7: Total Expense Ratios of Defence ETFs registered for sales in Europe – May 31, 2025 (in %)
Source: LSEG Lipper
Summary and Outlook
Themed mutual funds and ETFs are often seen as an attempt by product promoters to take profit from an emerging investment trend in a market niche or sector. To do so, the promoters are often marketing the respective products aggressively since any trend can be over immediately, since investors can become reluctant to invest in products which are launched to participate from an investment trend or theme.
I would tend to agree with this, but in some cases themed investment objectives make sense, especially if an investment theme is emerging from a broader demand in societies or the corporate world. From my point of view, defence is such a theme, as governments around the globe and especially NATO members are increasing their defence budgets to maintain their ability to defend themselves and/or to modernize their military since modern warfare is not comparable to armed conflicts in the past.
The investment rationale for defence ETFs just got even stronger since NATO members agreed on June 25, 2025, to increase their defence spending from 2.0% to 5.0% of their respective GDPs until 2035. These 5.0% are split up in 3.5% in core defence requirements and 1.5% toward protecting critical infrastructure, defending networks, ensuring civil preparedness and resilience, enhancing innovation, and strengthening the defence industrial base. The decision to explicitly include defence-related infrastructure spending in the overall defence spending goal may lead to new defence-themed investment products or an extension of the investment objective of the existing products to include infrastructure. For investors, it seems to be more important that the new spending goal is a long-term goal, which means that the defence investing theme has become a long-term investment theme. Nevertheless, investors need to bear in mind that most NATO members did not even hit the 2.0% goal, and some member states are still reluctant to increase their overall defence spending due to budget concerns.
That said, as in general and especially for themed or sector products, investors need to conduct their research carefully because no ETF within this study has the same portfolio structure when it comes to the country weightings and, as a result, also with regard to underlying companies. This means that even as all these ETFs share a common investment theme, their performances may vary broadly in the future.
As always, it is also important that investors take the costs of their investments in consideration. It is totally normal that themed ETFs have a higher TER (0.398% on average) than plain vanilla ETFs (0.352% average of all equity ETFs). Nevertheless, the latest launches show that the TER seems to be a battleground for product promoters since the latest launched defence ETFs have a (significantly) lower TER than the older ones. This means that we may see decreasing TERs for defence ETFs over time.
More generally, after the outbreak of the war in Ukraine some investors made the point that investments in defence should be eligible for ESG-related products since the protection of democratic structures contributes to the overall freedom and wealth of societies. Even as this is obviously true, there was a broad discussion about this and a number of investors agree with this point of view. One needs to bear in mind, however, that controversial weapons are generally excluded from ESG-related investments, so this means any provider who wants to offer a defence product which is aligned to the “S” of ESG needs to analyze the respective investment universe very carefully to avoid a breach of the more general rules for ESG products.
In conclusion, it can be said that defence is an investment theme which has a high relevance in the real world and can’t therefore be seen as a pure marketing story. From an external view, it is to be expected that the increasing defence spending by NATO members should lead to higher revenues for the producers of the weapons and equipment needed by those states to achieve their goals over the course of the next 10 years. Nevertheless, investors need to be cautious when investing in any kind of themed investment products, as the trend in the stock markets can stop or revert, if it falls out of favor—even if the investment rationale is still in place. This means that the respective products can show a negative (relative) performance, even when the underlying theme is still working.
This article is for information purposes only and does not constitute any investment advice.
The views expressed are the views of the author, not necessarily those of Lipper or LSEG.
