For too long, there has been a limited investment base in publicly traded defense stocks — even as the benchmark SPADE Defense Index produced a 15-year return of nearly 17% annually.
Many institutional and professional investors remained on the sideline either due to their aversion to the sector’s activities or viewing it as a niche market. That has begun to change.
Even though the sector still remains small compared to technology, semiconductors, and other industries, the past year has seen a significant influx in money invested into the sector and the publicly traded funds being offered to investors. The number of exchange traded funds (ETFs) investing in the sector has grown from four in 2022 to 27, with the assets being managed through these vehicles up nine-fold, to more than $35 billion.
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A dynamic shift in the investor perception of the defense industry is underway. Increased attention to government spending on defense has sent the world’s publicly traded defense stocks higher, providing significant gains over the past several years.
According to the Stockholm International Peace Research Institute think tank, total government spending on defense in 2024 reached a record $2.718 trillion, up 9.4%, the steepest rise since the end of the Cold War. Fueled by the rapid growth in spending by nations in Europe (including Russia) and the Middle East, defense spending has increased for 10 consecutive years.
Of note—Russia increased its defense spending by 38% to approximately $149 billion, representing 7.1% of its GDP and 19% of its total government spending. Ukraine, at $64.7 billion, spends just 43% of what Russia does, yet this amounts to 34% of its GDP, the largest burden in the world.
While historical growth provides a basis for comparison, investments are managed looking toward the future. It was only a few months ago, in early 2025, that it appeared that the conflicts between Russia and Ukraine as well as between Israel and various terrorist factions in the region could be resolved before the year was over. Looking back, that was optimistic.
Russian aggression toward Ukraine has seen a clear escalation while ceasefire discussions have gone nowhere. Israel, following a prisoner swap earlier in the year, has begun a new phase in trying to root out any remaining terrorist elements and a permanent peaceful solution seems fleeting. The Houthis continue to target commercial shipping vessels and Western-aligned targets despite U.S. military responses. North Korea and Iran remain a concern. And lastly, India and Pakistan engaged in military actions into the others’ territories — although for now it appears the U.S. and Europe do not have strong interests in this conflict.
Without a doubt, the 2020s have been marked by profound geopolitical tensions not seen since the end of the Cold War.
Investors have been taking notice of the dramatic European response to the conflict on their Eastern front. The “peace dividend” Europe experienced following the fall of the Soviet Union in the early 1990s has been replaced with a concerted effort to deter a future attack by Russia and reduce its dependency on the United States. The European Commission has proposed to finance a number defense initiatives including: €800 billion ($932 billion) over four years (“SAFE” - Security Action for Europe); relaxed EU deficit rules (“Rearm Europe”); and a 150-billion-euro fund to boost EU production.
Additionally, countries sharing a border with Russia have also found it necessary to significantly increase their defense budgets. The German parliament has called for a €1 trillion investment and, in 2024, increased its defense budget by 28% to $88.5 billion. Likewise, Poland has increased theirs by 31% to $38 billion.
This response by European nations comes as the United States apparently withdraws from the active leadership role on global security that it has maintained since the conclusion of World War II, nearly 70 years ago. Instead of working together to confront the aggressive actions of Russia (who is building a force to take on NATO after it concludes operations in Ukraine), the U.S. and the European Union have been decoupling. As the U.S. goes evermore silent, German troops are engaged in its first foreign deployment since WWII, Lithuania is planting mines to slow a possible Russian incursion, and Finland is increasing security at its border.
To invest in this dynamic shift in European priorities and increased defense spending trajectory, more than a dozen European-focused ETFs have been launched on stock exchanges around the continent and in the U.S. over the past 18 months. These have attracted nearly $15 billion in assets to date and the share prices of many defense stocks headquartered in Europe have doubled over that time — Rheinmetall is up nearly 1,000% since the Russian invasion of Ukraine and more than 2,700% over the past five years.
As “Buy European” expands, the large U.S. defense contractors have begun to establish new partnerships to ensure they remain part of the European aerospace and defense ecosystem. Nevertheless, with a defense budget near $1 trillion and $150 billion in new funds for the recently announced Golden Dome system (much of which will pass through to U.S. firms); the United States is unlikely to cede its position as the world’s largest supplier of military equipment and services.
Still, the impact of U.S. tariffs could add to the global supply chain challenges already faced by a defense sector seeking to meet an uptick in demand.
Defense News’ Top 100 list contains 70 publicly traded companies — or at least their parent organizations — that represent about 77% of the list’s total FY24 global defense revenues of $661.1 billion (up 9.5% from last year). If one excludes Chinese companies from the list, public companies represent 90% of revenues.
From an economic standpoint, the defense sector is not large and has plenty of room to grow. Globally, military activities represent around 2.5% of global GDP. As nations respond to global threats in order to protect their borders and citizens, the resources devoted to the sector continues to rise. Additionally, new technologies constantly evolve the nature of warfare as military planners seek an edge. The implementation of artificial intelligence to improve military systems and adapting to the use of cheap drones and unmanned vehicles as demonstrated in the “field laboratory of the Ukraine,” are two of the latest growth opportunities.
Since the start of the Russia-Ukraine conflict through mid-summer 2025, the benchmark SPADE Defense Index has risen by 90% (vs. 40% for the U.S. stock market). Over the past 28 years, it has produced a positive gain in 23 of them, outperforming the S&P 500 roughly 71% of the time. For investors, a portfolio of defense sector stocks has shown to be a solid investment in both good times as well as troubled ones.
Scott Sacknoff manages the SPADE Defense Index, a modified capitalization-weighted index made up of companies operating in the defense, homeland security and government space sectors.