Defence ETFs are currently experiencing an unprecedented boom. Within just a few months, new funds such as Wisdom Tree Europe Defence have raised over a billion dollars. Products from HANetf, Van Eck and Blackrock reached the billion mark earlier.

The Russian invasion of Ukraine marked a turning point for Europe in terms of security policy – and at the same time a change of direction on the financial markets with new offerings. For decades, the defence sector was considered ethically questionable in large parts of the fund industry. However, the debate has shifted: security is no longer seen as a contradiction to sustainability, but increasingly as its prerequisite.

The boom in defence ETFs is also being driven by military spending. In 2024, military spending rose at the highest rate in decades. In Germany, a huge special fund was set up for the Bundeswehr. NATO countries have also significantly increased their defence spending: 18 out of 32 members now meet the 2% target, twice as many as in 2023.

Investors are increasingly looking for vehicles to invest specifically in security and defence technology – both as a hedge against geopolitical risks and as a source of returns in a politically supported growth market. Defence is increasingly seen as a strategic sector, comparable to energy or infrastructure. Thematic defence ETFs offer direct access here. They make it possible to invest in a diversified portfolio with one click – including manufacturers of tanks, fighter aircraft, communication systems, or cyber defence technologies.

This dynamic in volumes is also linked to returns. The Van Eck Defense achieved an annual performance of more than 50% in 2024. The „Future of Defence“ from HANetf and the „Europe Defence Ucits ETF“ from Wisdom Tree also made significant gains. „The performance of the Van Eck Defense ETF is inevitably influenced by the defence budgets of governments and security policy decisions in the most important markets,“ says Alessandro Valentino, Product Manager at Van Eck. At the same time, he points out the risks: „Defence procurement cycles can be susceptible to funding cuts or overruns, and disruptions to these programmes can lead to negative profit revisions and losses in the value of the ETF.“

Also established is the iShares U.S. Aerospace & Defense ETF, which manages more than 5 billion dollars. It invests in industry giants such as GE Aerospace, Boeing and RTX. The ETF benefits from many years of market experience, high liquidity, and broad coverage of the US defence industry.

Thematic ETFs on defence stocks are regarded as satellite positions in portfolio allocation. They are used for targeted exposure to trends, but are not suitable as a core component due to their sector concentration and volatility. ETF providers nevertheless endeavour to offer a balanced risk profile through geographical and technological diversification. Van Eck notes that the defence ETF enables investments in companies involved in national defence and security, "in other words, in companies that democratic governments rely on to protect their citizens and deter aggression – not as a means to profit from warfare.“

Wisdom Tree points out that European defence spending is not just a response to crises, but is anchored in a long-term policy. „While tactical sentiment can be influenced by geopolitical news, the ETF's fundamental drivers are underpinned by structural capital flows, procurement contracts and industrial policies that are already underway,“ says Aneeka Gupta, director of macro research at Wisdom Tree.

Tom Bailey from HANetf explains: „Our two defence ETFs invest diversified in NATO and NATO+ countries, from traditional armaments to cybersecurity and dual-use technologies.“

Like other providers, Wisdom Tree explicitly excludes companies that violate international conventions or sanctions.

Van Eck manager Valentino says: „The Defence ETF applies controversial weapons screening and excludes companies involved in cluster munitions, anti-personnel mines, biological and chemical weapons, depleted uranium, incendiary weapons, white phosphorus and nuclear weapons outside the Non-Proliferation Treaty (NPT).“

Hardly any other area has recently polarised the debate on sustainable investment as much as the question: Are armaments sustainable? Until 2023, the answer was usually: No. But since then, a change has occurred. At the end of 2024, the German Investment Funds Association (BVI) revised the ESG target market concept, together with the banking industry: The general exclusion of companies with a turnover of more than 10 % in defence was dropped. This is due to new EU guidelines: In its rules for ESG-related funds published in 2024, ESMA allows investments in defence companies – as long as no weapons outlawed under international law are involved.

The fund company DWS is realigning with caution. ESG funds in accordance with the „DWS ESG Investment Standard“ remain restrictive and exclude companies that generate more than 5% of their turnover from defence-related products. However, the exclusions have been relaxed for traditional funds or products with a basic filter.

Philippe Zaouati, CEO of Natixis subsidiary Mirova, which specialises in sustainability, goes even further. In a position paper, he calls for the debate to be rethought: „Security is a basic condition for sustainable development.“ His proposal: a framework for „European defence bonds“ - similar to green bonds - to specifically promote dual technologies.

HANetf speaks of an „evolutionary understanding of ESG" security as a moral responsibility. And Gupta from Wisdom Tree adds: ‘ESG criteria are an integral part of the launch and management of the WisdomTree Europe Defence Ucits ETF.“

Ultimately, defence ETFs are not just a financial product, but also a seismograph for geopolitical upheavals and conflicts of social values. Their rise marks the capital markets' attempt to reposition themselves between security, responsibility and returns.