🔰 Fortify your portfolio: Why defence funds deserve a strategic allocation
📈 2025 outlook 🛡️ sector deep dive In an era marked by resurgent great‑power competition, asymmetric threats, and rapid militarisation of space & cyber, the global defence industry has transformed from a “sin stock” niche into a structural growth story. Defence funds – spanning aerospace, cybersecurity, robotics, and traditional shipbuilding – offer investors a way to capitalise on sovereign spending that now exceeds $2.4 trillion annually (Stockholm International Peace Research Institute). This blog post dissects the compelling case for defence funds, complete with performance tables, key holdings, risk analysis, and actionable insights.
🌍 1. Geopolitical reset – the new normal
Russia’s invasion of Ukraine, tensions in the South China Sea, and the Middle East volatility have shattered the post‑Cold War peace dividend. NATO members have pledged at least 2% of GDP on defence – Germany alone created a €100 billion special fund. Across Asia, Japan is doubling its defence budget, South Korea plans to acquire nuclear‑capable assets, and Australia is building a nuclear‑powered submarine fleet under AUKUS. This isn’t a cyclical spike; it’s a multi‑decade reinvestment cycle. Defence funds aggregate companies that are direct beneficiaries of these multi‑year procurement programs.
⚙️ 2. Structural growth drivers beyond conflict
- Modernisation & replacement: Ageing fleets (F‑16s, tanks, ships) need replacement with 5th‑gen fighters (F‑35), unmanned systems, and hypersonic missiles. Backlogs at Lockheed Martin, RTX, and BAE Systems stretch years ahead.
- Technology convergence: AI‑driven battle management, cyber defence, and space‑based ISR (intelligence, surveillance, reconnaissance) are now integral. Defence funds increasingly hold tech names like Palantir, Thales, and Leidos.
- Export boom: The US, France, and South Korea are ramping up arms exports. Deals like the GCAP (global combat air programme) and frigates for Greece/Poland create revenue streams independent of domestic budgets.
- Space as a warfighting domain: Space Force, satellite constellations (Starlink for defence, GPS III) – space budgets are soaring. Funds with exposure to satellite makers and launch providers capture this.
📊 3. Types of defence funds & how they differ
| Fund type | Examples | Typical holdings | Expense ratio |
|---|---|---|---|
| Aerospace & defence ETFs | ITA (iShares), PPA (Invesco), XAR (SPDR) | Boeing, Lockheed, Northrop, TransDigm, HEICO | 0.20% – 0.42% |
| Global defence funds (active) | Hodgson Global Defence, BGF World Mining (sub‑defence) | BAE Systems, Rheinmetall, Dassault, Hanwha | 0.75% – 1.30% |
| Cyber & space‑themed ETFs | CIBR (First Trust), UFO (Procure Space) | CrowdStrike, SpaceX (pre‑IPO secondary), Maxar | 0.60% – 0.78% |
| Defence‑focused mutual funds | ICON Defense & Aerospace, Invesco Aerospace | Similar large‑cap defence primes | 1.10% – 1.45% |
📈 4. Performance analysis (5‑year total returns, as of Dec 2024)
Defence equities have consistently outpaced the S&P 500 over the past decade, with lower correlation to economic cycles. The table below compares major defence ETFs against broad benchmarks.
| Index / ETF | 1‑year return | 3‑year annualised | 5‑year annualised | Volatility (std dev) |
|---|---|---|---|---|
| iShares US Aerospace & Defense (ITA) | +23.8% | +14.2% | +13.5% | 19.4% |
| Invesco Aerospace & Defense (PPA) | +24.9% | +15.7% | +14.1% | 20.1% |
| SPDR S&P Aerospace & Defense (XAR) | +22.1% | +13.9% | +12.8% | 21.3% |
| S&P 500 | +18.4% | +9.8% | +11.2% | 17.2% |
| MSCI World (DM) | +16.2% | +8.5% | +10.1% | 16.8% |
🏭 5. Key holdings & sector concentration
Top constituents of a typical defence fund read like a who’s who of national security. Below is a snapshot of the largest positions in the iShares ITA ETF (as of March 2025).
| Company | Country | Segment | Weight (%) | Notable program |
|---|---|---|---|---|
| Lockheed Martin | USA | Aeronautics, Missiles | 8.9% | F‑35, THAAD |
| RTX (Raytheon) | USA | Missiles, Cyber, Engines | 8.1% | Patriot, JASSM |
| Northrop Grumman | USA | Space, Drones | 7.5% | B‑21 Raider, James Webb |
| General Dynamics | USA | Shipbuilding, Land | 6.8% | Virginia‑class submarines |
| Boeing | USA | Military aircraft | 6.2% | F‑15EX, KC‑46 |
| TransDigm Group | USA | Aircraft components | 5.7% | proprietary subsystems |
| BAE Systems | UK | Electronic systems, ships | 4.1% | CV90, Dreadnought |
| HEICO Corp | USA | Components, repair | 3.9% | aftermarket parts |
Notice the heavy US tilt – but global funds include Rheinmetall (Germany, +70% in 2024), Dassault Aviation (France), and Saab (Sweden), which have outperformed recently on European rearmament.
⚠️ 6. Risks every investor must weigh
🔸 Political & regulatory risk
Defence budgets depend on government appropriations; a shift toward dovish administrations could slow spending. Export controls (ITAR) can restrict revenue. Also, major programmes may face cancellation (e.g., cost overruns).
🔸 Valuation & cyclicality
Defence stocks often trade at a premium during crises. Currently, the sector’s P/E (~22x) is above historical average. A sudden de‑escalation could trigger multiple contraction.
🔸 ESG & ethical considerations
Many institutional investors exclude defence due to ESG mandates. While this can create pricing inefficiencies, it also limits capital inflows. Retail investors should align with personal values.
🧭 7. How to invest – direct vs. funds
Picking individual defence winners requires deep knowledge of procurement cycles, political winds, and technological edges. Funds offer instant diversification and lower volatility. For most, a low‑cost ETF like PPA (which equally weights holdings) or ITA (market‑cap weighted) provides broad exposure. Consider adding a thematic ETF for cyber (CIBR) if you want pure‑play tech defence. Allocate between 3% and 8% of a globally diversified portfolio, depending on your risk appetite.
🔭 8. Future outlook – why the runway is long
Beyond immediate conflicts, the defence industry is riding secular waves: autonomous systems (drones, robotic vehicles), hypersonics, directed energy, and quantum encryption. Space is the next high ground – over 50% of new satellite orders are defence‑related. Moreover, the pivot to “dual‑use” technologies (e.g., Anduril, SpaceX) blurs lines between defence and commercial tech, attracting growth investors. The combination of order backlogs (often 3‑5 years) and pricing power (cost‑plus contracts) provides earnings visibility rare in other sectors.
From the F-35 assembly line to cybersecurity operations centres, the companies inside defence funds are at the forefront of protecting national interests – and generating shareholder value. While risks exist (ethical, political, valuation), the multi‑year spending commitments across NATO, Asia, and the Middle East provide an uncommon level of earnings certainty. Whether you choose a broad ETF like ITA or a global active fund, a measured allocation to defence can add both resilience and growth to a long‑term portfolio. As always, consult with a financial advisor to ensure alignment with your goals.