Rising geopolitical tensions and long-term increases in European defence spending have brought defence ETFs into sharper focus. Yet these funds can differ significantly in their geographic exposure, index methodology, holdings, concentration and risk profile. This article compares the key differences between defence ETFs and also examines how cybersecurity and infrastructure fit into the broader security investment theme.
This content has been produced by Kvarn Investment Services Ltd, a licensed investment firm supervised by the Finnish Financial Supervisory Authority. The content is intended for informational purposes only and should not be interpreted as investment advice or recommendation. All investing involves risks, and past performance is not a guarantee of future returns.
The transformation of Europe’s security environment is now visible in governments’ multi-year budgets, industrial order books and investment in critical infrastructure. From an investor’s perspective, however, the trend is easily oversimplified: rising defence spending does not automatically mean that every defence company or ETF tracking the sector will benefit in the same way.
Security itself has also become a broader concept. Alongside military capability, cyber defence, telecommunications networks, energy infrastructure, ports, data centres and supply-chain resilience have all grown in importance. The same geopolitical shift can therefore appear across several ETF themes whose return drivers and risks differ materially.
This article examines three questions: what is driving security investment, how different ETF structures compare and what risks accompany a powerful investment theme.
According to SIPRI, global military expenditure reached $2,887 billion in 2025. Spending rose by 2.9 percent in real terms, marking the eleventh consecutive year of growth. In Europe, expenditure increased by 14 percent. These figures demonstrate the rise in spending, but the more important consideration for investors is the time horizon of the decisions involved: this is not simply about a single budget year, but about capacity, procurement and infrastructure programmes extending years into the future.
Global military expenditure has now risen for 11 consecutive years, although the pace of growth slowed in 2025 after the sharp increase recorded in 2024.
More important still is what has already been decided for the years ahead. At the NATO summit in The Hague in June 2025, NATO allies committed to invest 5 percent of GDP annually in core defence requirements and broader defence- and security-related spending by 2035. At least 3.5 percent of GDP is to be allocated to core defence requirements, while up to 1.5 percent may be counted for areas such as critical infrastructure, network protection, civil preparedness and resilience, innovation and the defence-industrial base. The commitment does not guarantee that individual projects will be implemented, but it broadens the security theme beyond the traditional defence industry.
NATO’s five percent commitment is divided between core defence requirements and broader defence- and security-related spending. Source: NATO, The Hague Summit Declaration 2025.
The same direction is evident in the EU and in national budgets. The EU’s Readiness 2030 initiative is designed to mobilise close to €800 billion in additional defence spending and investment. This includes the SAFE instrument, which can provide up to €150 billion in loans to member states. At the same time, Germany’s €500 billion special fund for infrastructure and climate neutrality allows investments to be approved over a 12-year period from 2025 to 2036. Not all of this funding will flow directly to listed companies, and implementation will not proceed in a straight line. Even so, these commitments indicate that the investment cycle in security, industrial capacity and infrastructure is likely to be exceptionally long.
A fund’s name identifies its theme, but not the type of business, geographical exposure or valuation risk an investor is taking on. Two defence ETFs may hold very different companies and respond differently to the same market environment.
The first choice is geographical. The iShares Global Aerospace & Defence UCITS ETF (5J50) tracks aerospace and defence companies in developed markets, combining major US companies with European and other developed-market peers. Its global structure offers broader geographical diversification, but it also reduces the portfolio’s sensitivity to European defence spending compared with a Europe-only product. For a euro-based investor, currency risk arises mainly from the currencies of the underlying holdings – particularly the US dollar – rather than from the currency in which the ETF is traded.
European products, such as the iShares Europe Defence UCITS ETF (DFNC) and the WisdomTree Europe Defence UCITS ETF (EUDF), focus on European companies involved in the defence sector. They provide more targeted exposure to the expansion of European capacity, but the narrower mandate also creates a smaller investable universe that is more dependent on political and procurement decisions. Because the European defence universe is relatively concentrated, a small number of large holdings may account for a substantial share of the fund.
The second distinction lies in how an index defines a defence company. Some indices select companies according to sector classifications, which can include diversified businesses that derive only part of their revenue from defence. More stringent methodologies apply revenue screens: a company is included, or receives a larger weighting, only when a sufficient share of its revenue comes from defence activities. The Future of European Defence Screened UCITS ETF (8RMY), for example, targets companies connected to European NATO-member defence and cyber-defence spending while excluding US exposure. Its methodology illustrates how revenue thresholds and business-activity screens can be used to keep an index more closely linked to defence and security.
The third distinction concerns ethical exclusions. Many European defence ETFs exclude companies associated with controversial weapons, such as cluster munitions or anti-personnel mines, using rules defined by the relevant index provider. The word Screened in a product name may indicate such restrictions. The scope of these exclusions differs between products, so investors for whom these boundaries matter should review both the index methodology and the fund documentation.
The third distinction is technological exposure. Defence technology ETFs seek exposure to the part of the value chain in which defence is increasingly defined by software, sensors, data, space systems and autonomous technologies. The Global X Defence Tech UCITS ETF (4MMR) and the Invesco Defence Innovation UCITS ETF (IVDF), for example, emphasise this perspective. Their returns can therefore be influenced not only by defence budgets, but also by technology-sector valuations, interest rates and investors’ appetite for risk.
In the modern world, an attack does not always look like an attack. It may take the form of a data breach, ransomware, a hospital system outage or a vulnerability in the electricity grid. Cybersecurity therefore belongs in the same discussion, even though it is not a defence ETF in the traditional sense. NATO’s Hague commitment includes network protection and critical-infrastructure resilience within the broader allocation of up to 1.5 percent of GDP.
The cybersecurity theme can be approached through products such as the Global X Cybersecurity UCITS ETF (BUG) and the iShares Digital Security UCITS ETF (IS4S). Demand does not come from governments alone, as every digitalising company is a potential cybersecurity customer. Cybersecurity companies are nevertheless growth- and technology-driven, so the theme is not a direct exposure to defence budgets but primarily to the markets for software and digital security. Share classes also differ: the IS4S listing referred to here is a distributing share class, while many of the other examples in this article are accumulating share classes.
Infrastructure is a less visible part of the security theme, but an important one for investors. Power grids, ports, data centres and railways are often noticed only when they fail – which is precisely why they are so important in a geopolitical environment. At the same time, artificial intelligence and electrification are increasing demand for electricity and computing capacity so quickly that physical infrastructure is becoming a constraint on growth.
An exceptional amount of public funding capacity has been made available. NATO’s broader allocation of up to 1.5 percent of GDP may include expenditure related to critical infrastructure, while Germany’s €500 billion special fund supports investment in areas including transport, digitalisation, energy infrastructure and climate neutrality over the coming decade. Large infrastructure programmes nevertheless advance in stages: budget approval, project planning and construction take place on different timelines. Their economic effects may therefore emerge slowly but persist for many years.
The infrastructure theme can be approached through products such as the broad iShares Global Infrastructure UCITS ETF (CBUX) or the Global X Data Center REITs & Digital Infrastructure UCITS ETF (V9N), which focuses on data centres and related digital infrastructure. The key point is that an infrastructure ETF is not a defence ETF: its return drivers include interest rates, regulation, energy demand and investment cycles rather than defence budgets directly. Adjacent themes are therefore not interchangeable, even when they are partly driven by the same geopolitical shift.
Investing in defence raises a genuine ethical question that should not be overlooked. Some investors do not wish to own companies that manufacture weapons in any form, and only a few years ago many ESG funds excluded defence companies altogether. Others regard defence capability as essential to protecting democratic societies – a view that has become more common in Europe since 2022 and has also shifted the focus of the responsible-investment debate.
Neither position can be resolved through investment analysis, because the choice is ultimately a matter of personal values. Investors can, however, make that choice consciously: many European defence ETFs exclude controversial weapons, and both fund holdings and exclusion policies are available in the product documentation. If your own boundary differs from that set by the index provider, the only way to determine this is to read the rules yourself.
A compelling investment narrative does not make these products risk-free. The theme remains exposed to valuation, concentration, political, methodological and implementation risks.
The first risk is valuation. Structural demand can remain strong even when share prices already reflect a large proportion of the expected growth. An attractive industry does not automatically offer an attractive expected return at any price.
The second risk is concentration. The number of European defence companies is limited. A few large holdings may make up a significant share of a fund, meaning that a single procurement decision, profit warning or political change can affect the entire ETF.
The third risk is political. Defence spending is determined by political decisions, and procurement may be postponed, redirected or cancelled. A potential easing of tensions or ceasefire may also change market sentiment rapidly, even if long-term commitments remain in place.
The fourth risk depends on the product type. Defence technology and cybersecurity ETFs carry the valuation risks associated with technology shares, infrastructure products are exposed to interest-rate and regulatory risks, and global products can introduce material foreign-exchange exposure. The theme may be shared, but the risk profiles are not.
The fifth risk is ethical and methodological. Exclusion policies are not consistent across funds. An investor’s own values may differ from the index provider’s definition, making it necessary to review both the holdings and the index rules separately.
Geopolitics has evolved from a short-term news flow into a long investment cycle. Its effects are visible in defence budgets, production capacity, cybersecurity and critical infrastructure. The central point for investors is nevertheless this: a single security theme encompasses several different business models and risk profiles.
Assessing a defence ETF should begin with the fund’s holdings rather than the thematic narrative. Geography, index rules, revenue screens, concentration and valuation matter more than the product name. A powerful structural driver may support demand for companies over a long period, but it does not eliminate the risks associated with timing, price or implementation.
The information and sources presented are for illustrative purposes only. While obtained from sources deemed reliable, their accuracy cannot be guaranteed.
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