Q&A Series: The world is rearming at a record pace – so why have defence stocks stalled?

Global military spending continues to climb as governments respond to a more fragmented and uncertain geopolitical environment. The US is considering a larger defence budget under President Trump, while NATO members are ramping up spending to strengthen their own defence capabilities and reduce reliance on Washington. At the same time, conflicts in Ukraine and the Middle East have underscored the need to replenish depleted ammunition stockpiles, modernise weapons systems and expand defence industrial capacity. Against this backdrop, investors are increasingly looking at defence as a long-term structural growth theme.

In this article, we share insights from VanEck on the global defence landscape, and what responsible investing in defence looks like today.

Introducing the VanEck Defense UCITS ETF

The VanEck Defence UCITS ETF (LSE: DFNS) provides diversified exposure to the global defence industry at a time of unprecedented rearmament. Tracking the MarketVector™ Global Defence Industry Index, it invests across the full spectrum of modern defence – from traditional aerospace and munitions manufacturers to cybersecurity software and unmanned vehicles.

Table 1: Key information about the ETF

ETF Details
Underlying Index	MarketVector™ Global Defense Industry Index
Base Currency	USD
Trading Currency	USD
LSE Code	DFNS
Listing Date	31 March 2023
Number of Holdings	40
Assets Under Management	USD 8.5 Billion
Trading Board Lot Size	1 unit
Expense Ratio	0.55%
Dividend Distribution Frequency	None
Source: VanEck. Data as of 28 May 2026

1. Do you view the current surge in global defence spending as a temporary response to recent geopolitical conflicts (e.g. Russia–Ukraine war, US–Iran tensions), or a permanent structural shift in global fiscal priorities?

We see it as a structural shift, and the distinction matters for how investors should think about the sector's long-term return profile.

The catalyst may have been geopolitical shocks, particularly Russia's full-scale invasion of Ukraine in 2022, the escalation of Middle East tensions, and the broader realignment of US foreign policy under the Trump administration, but the spending response has now been institutionalised through binding multi-year commitments. In June 2025, all 32 NATO members agreed to raise defence spending to 5% of GDP by 2035, more than doubling the prior 2% benchmark. Germany passed its €100bn Sondervermögen, France updated its multi-year LPM, and Poland is now spending above 4% of GDP. Using NATO methodology, all members reached the previous 2% target, for the first time. These are legislative commitments, not discretionary budget lines. They do not reverse if a conflict de-escalates.

The structural case also goes beyond any single conflict. Decades of underinvestment across NATO have left European armed forces with depleted equipment inventories, ageing platforms, and insufficient ammunition stockpiles. Global munitions supplies have been depleted by a series of conflicts, adding to pressure on governments to rebuild inventories. Rebuilding those stockpiles and modernising to meet current threat environments, air and missile defence, autonomous systems, cyber, space, is a decade-long programme regardless of what happens in Ukraine or Iran.

The principal risk to this thesis is not a peace agreement, as contracted backlogs are resilient to that. The risk is a sustained shift in political priorities: a reordering of fiscal budgets under austerity pressure, or a generational change in voters' willingness to fund defence. That is rather a medium-to-long-term tail risk, not a near-term one.

2. DFNS’ performance has been relatively flat year-to-date. Why haven’t defence stocks reacted more strongly to heightened geopolitical tensions over the past year?

DFNS is up approximately +1.1% year-to-date as of 19 May 2026, broadly flat, despite an extraordinary geopolitical backdrop that includes ongoing US operations in Iran, continued fighting in Ukraine, and NATO rearmament at historic pace. The underperformance relative to the macro narrative is an important question, and we think several forces explain it.

First, this is a classic "buy the rumour, sell the war" dynamic. Share prices of leading American defence primes have all fallen since the US bombed Iran at the end of February, despite the military's massive expenditure of ordnance drawing attention to mounting production backlogs. Stocks like Lockheed Martin, Northrop Grumman, and RTX had already re-rated 50% or more in the 12 months prior to the conflict's outbreak, much of the geopolitical risk premium had been priced in. Lockheed Martin, Northrop Grumman, and RTX's stock all increased by about 50% in the year up to the outbreak of the conflict, powered by Trump's budget request boosting defence spending, as well as ongoing turmoil in Ukraine and the Middle East.

Second, markets have focused on a structural constraint: "The top-line growth for these defence companies is not going to be constrained by demand, but by capacity¹," as Bank of America's defence analyst noted. The US has burned through munitions faster than they can be replenished. Revenue recognition only occurs on delivery and not on order, so elevated conflict activity increases backlogs, but does not accelerate near-term earnings.

Third, there is meaningful budget uncertainty. Trump's $1.5tn budget proposal might have not been priced in because investors know there is a long way to go, it is an unpredictable process, compounded by midterm elections.

Finally, some of the Q1 earnings disappointed. Rheinmetall's Q1 results fell significantly short on revenue and EPS due to delivery timing issues, and markets, having priced these names for near-perfect execution, responded harshly.

In our view, the fundamentals for the sector remain intact. The current flat performance reflects a consolidation and re-rating of elevated multiples, not a deterioration in the demand outlook.

¹ https://www.ft.com/content/1c9c4694-2ed3-4aac-8f64-2cbc5fb0e7cc?syn-25a6b1a6=1

3. Which regions currently offer the most attractive investment opportunities within the global defence sector?

DFNS holds a global portfolio with a good split between US, European producers and Asian and we think that diversification is currently an advantage rather than a risk, given regional divergences in performance.

South Korea has been the standout in recent months. Hanwha Aerospace, Hanwha Systems, Korea Aerospace Industries, and Hyundai Rotem collectively accounted for virtually all the positive attribution in the portfolio during April–May 2026. Korean defence companies are benefiting from a combination of competitive export pricing, rapid production scale-up, and growing demand from European buyers seeking to diversify away from US supply chains.

Europe remains the most compelling structural growth story over the medium term. Government spending commitments are largest and accelerating here, and European primes have backlogs at record levels. The near-term underperformance of names like Saab, Leonardo, and Thales reflects valuation consolidation after a very strong 2024–2025 run, not a deterioration in fundamentals.

The US remains the largest weight in the portfolio and offers unparalleled revenue scale and programme diversification, but is also facing the most near-term headwinds from earnings execution concerns, programme delays, and budget process uncertainty.

Israel offers concentrated exposure to air and missile defence, UAVs, and electronic warfare through Elbit Systems and Next Vision Stabilized, sub-sectors with strong structural demand given the threat environment.

4. Could you walk us through the different sub-sectors within defence and explain how DFNS is positioned across these areas?

The MarketVector Global Defense Index uses eight proprietary thematic classifications to capture the full spectrum of modern defence. Based on the Q1 2026 portfolio, the breakdown is approximately as follows:

Aerospace & Defence Products & Services (~72% of portfolio weight) is the largest bucket and covers traditional prime contractors and platform manufacturers — aircraft, armoured vehicles, naval systems, missiles, and ammunition. Key holdings include RTX, Thales, Leonardo, Hanwha Aerospace, Saab, Elbit Systems, and Dassault Aviation.

Event Response, Security & Safety Software (~21%) captures companies providing software for situational awareness, command and control, and crisis management. Palantir is the flagship name here; Leidos, CACI, and Parsons also sit in this theme.

Communications Systems & Services (~16%) covers secure military communications, datalinks, and networks. Thales, Saab, Kratos, and Leidos feature prominently.

IT Hardware & Services (~16%) includes companies providing defense-grade computing infrastructure, sensors, and electronics. Leidos, Hensoldt, Mercury Systems, and Leonardo DRS.

Cybersecurity (~8%) is a growing theme with Hensoldt, Leidos, Parsons, and SAIC as key representatives. This sub-theme reflects the increasing digitisation of conflict and the growing importance of network defence.

Unmanned Vehicles (~9%) is the fastest-growing thematic area, covering drones, UGVs, and autonomous platforms. Holdings include AeroVironment, Kratos, Ondas Holdings, CSG NV, and DroneShield, a cluster of names that performed strongly during the Iran conflict as drone warfare attracted significant investor attention. In fact, all defense majors are currently involved in unmanned vehicles in some kind of way. Some more than another.

Training & Simulation (~7%) covers companies providing mission rehearsal and training systems, Kratos, Korea Aerospace Industries, and Babcock International.

Digital Forensics & Detection (<1%) is a small but distinctive allocation covering biometric identification and threat detection, OSI Systems is the primary representative.

The portfolio's weighted average defence revenue exposure stands at approximately 65%, meaning that two-thirds of revenues across holdings are derived directly from defense-related activities.
 

5. For investors who feel uncomfortable allocating to defence on ethical or ESG grounds, what is your response? Are there any categories of weapons that the ETF explicitly excludes?

We take this concern seriously and recognise that defence sits at one of the more contested intersections of ESG and thematic investing. Our position is that defence investment, when properly scoped, might be consistent with responsible investment principles, and that the ESG conversation around defence has evolved meaningfully since Russia's 2022 invasion of Ukraine.

On exclusions: DFNS applies hard exclusions for companies with material involvement in cluster munitions, anti-personnel mines, biological and chemical weapons, depleted uranium, white phosphorus and nuclear weapons outside of the Non-Proliferation Treaty framework. These exclusions are applied at the index level through ISS ESG screening data and are applied in all rebalancing reviews. Additionally, ISS Norm Based research score is used to exclude companies involved in controversies or violating UN Global Compact principles as well as OECD guidelines for multinational enterprises.

There is a growing number of European institutional investors investing in defence companies considering this mindset change.

6. How does DFNS differ from other global defence ETFs in terms of index methodology, performance, and overall portfolio exposure?

The three main UCITS peers are HANetf Future of Defence (NATO), iShares Global Aerospace & Defence (DFND), and Global X Defence Tech (DFEN). Here is how we see the key distinctions:

DFNS vs. HANetf Future of Defence (NATO): HANetf tracks the EQM NATO+ Future of Defence Index. DFNS has established itself as the larger and the most well-known defense product in Europe. DFNS offers broader geographic scope and less exposure to non-defense related sectors like commercial cybersecurity.

DFNS vs. iShares Global Aerospace & Defence (DFND): DFND tracks the S&P Developed BMI Select Aerospace & Defense Index, which is a more traditional aerospace-and-defence benchmark that includes commercial aerospace (Boeing, Airbus, and their supply chains) alongside pure-play defence. This results in a more diluted pure-play defence exposure.

DFNS vs. Global X Defence Tech (DFEN): Global X takes a technology-forward approach, with heavier weighting toward defence software, AI, and dual-use technology names. DFNS offers more balanced exposure between traditional primes and emerging tech, providing more resilience when tech sentiment de-rates.

The core differentiator for DFNS is the combination of global geographic scope (including Korea and Israel), pure-play defense revenue focus, and multi-thematic construction that captures the full spectrum of modern defense — from platforms and munitions through to cyber, and autonomous systems.

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