Global Drivers of Increased Defence Spending
Several overlapping trends are driving increased military expenditures globally — and these forces are structural rather than cyclical:
- Geopolitical Tensions: The Russia-Ukraine war, rising Chinese assertiveness in the Indo-Pacific, Iranian-backed proxy conflicts in the Middle East, and growing instability in Africa all contribute to national defence build-ups.
- NATO and Allied Rearmament: NATO members have pledged to spend at least 2% of GDP on defence. Germany created a special €100 billion fund to modernise its military — a historic shift in German security policy.
- US-China Strategic Competition: The US National Defence Strategy identifies China as its primary long-term rival, leading to increased Indo-Pacific deployments, naval spending, and AI research investment.
- Cyber and Space Domains: Nations are investing heavily in cybersecurity, AI-driven warfare, satellite defence, and drone technologies — creating entirely new defence procurement categories.
"Defence ETFs like DFND, ITA and DFEU represent more than a sector play — they are a hedge against rising geopolitical instability and a bet on sovereign resilience."
Australia: DFND ETF
Fund Profile
The DFND ETF (BetaShares Australian Defence ETF) tracks companies with exposure to defence manufacturing, consulting, cybersecurity, and government contracts in Australia and allied nations.
Macro Context
Australia's defence budget is expected to exceed AUD 100 billion annually by 2030. The AUKUS partnership with the US and UK will involve nuclear submarine construction, quantum technologies, and cyber warfare investments — creating a multi-decade procurement pipeline.
Geopolitical Drivers
- China's maritime expansion in the South China Sea and pressure on Taiwan Strait lanes
- Regional deterrence needs in partnership with the US, Japan, and India (the Quad framework)
- Growing domestic political consensus around sovereign defence capability
Outlook (2025–2030)
Expect continued growth driven by AUKUS spending, increasing cybersecurity needs, and government support for local defence manufacturers. DFND may experience moderate volatility due to political shifts, but long-term fundamentals are strong. Estimated 5-Year CAGR: 8–11%, assuming steady GDP growth and defence outlays.
United States: ITA ETF
Fund Profile
The iShares U.S. Aerospace & Defence ETF (ITA) holds large-cap American defence contractors including Lockheed Martin, Raytheon Technologies, Northrop Grumman, and Boeing.
Macro Context
The US defence budget reached over $850 billion in 2024 — a historic high. This includes increased investments in hypersonic missiles, AI-enabled warfare systems, and the US Space Force. Long-term Pentagon contracts provide earnings visibility that few other sectors can match.
Geopolitical Drivers
- Taiwan Strait tensions and US Indo-Pacific posture requiring sustained forward deployment
- Military support for Ukraine and replenishment of NATO stockpiles depleted by the conflict
- Domestic reshoring of critical defence supply chains — a bipartisan policy priority
Outlook (2025–2030)
ITA is well-positioned due to the global dominance of US contractors. These firms benefit from long-term Pentagon contracts, global arms exports, and classified technology programs. Earnings stability and dividend income attract institutional buyers. Estimated 5-Year CAGR: 9–12%, with moderate political risk around budget ceiling negotiations and election cycles.
Europe: DFEU ETF
Fund Profile
The SPDR MSCI Europe Defence UCITS ETF (DFEU) includes defence firms from France, Germany, Italy, Sweden, and the UK — including BAE Systems, Thales, Leonardo, and Saab.
Macro Context
EU nations are converging on a common defence posture, accelerating joint procurement and research. Germany, France, and Poland are leading rearmament programs. The war in Ukraine has already depleted many European stockpiles, creating urgent replenishment demand independent of longer-term capability investment.
Geopolitical Drivers
- Ongoing war in Ukraine — direct catalyst for European rearmament and stockpile replacement
- Heightened terror threat levels across multiple EU member states
- Migration-related border security investment
- Strategic autonomy push — Europe reducing dependence on US security umbrella
Outlook (2025–2030)
European defence spending is climbing rapidly but varies by country. Bureaucratic inefficiencies and political fragmentation are risks, but DFEU benefits from long-term modernisation programs and NATO-linked funding commitments. Estimated 5-Year CAGR: 7–10%, with upside linked to EU defence integration progress.
ETF Comparison at a Glance
| ETF | Region | Key Holdings | 5yr CAGR Est. | Key Risk |
|---|---|---|---|---|
| DFND | Australia | ASX-listed defence, cyber, AUKUS contractors | 8–11% | Political shifts on defence spending |
| ITA | United States | Lockheed, Raytheon, Northrop, Boeing | 9–12% | Budget ceiling politics, election cycles |
| DFEU | Europe | BAE Systems, Thales, Leonardo, Saab | 7–10% | EU political fragmentation, procurement delays |
Risks: Political changes leading to defence budget cuts · Regulatory constraints on arms exports · ESG investing trends limiting institutional inflows.
Opportunities: Expansion into AI, quantum tech, space and cyber domains · Growing export markets in Asia, Middle East and Eastern Europe · Strong government support and multi-decade project cycles providing earnings visibility.
- The global defence spending cycle is structural, not cyclical — driven by geopolitical realignment that is unlikely to reverse within a 5-year investment horizon.
- ITA offers the highest CAGR estimate (9–12%) and the most liquid, diversified exposure to US defence contractors with stable earnings and dividend income.
- DFND benefits directly from AUKUS — Australia's most significant defence commitment since WWII — creating a multi-decade domestic procurement program.
- DFEU is positioned to benefit from European rearmament but faces headwinds from political fragmentation and slower procurement processes versus the US.
- All three ETFs offer diversified exposure — more appropriate for retail investors than single-stock defence bets, which carry individual execution risk.
- ESG screening is a material risk factor — significant institutional capital excludes defence sectors entirely, which can act as a structural valuation cap.