Defence stocks ‘on a tear’ as Europe hints at 5% NATO spend

Global defence ETFs have taken in a significant inflow of funds since the start of this year, as major economies within the NATO bloc push for a more than doubling of members’ spending commitments.

Eleven years after committing to spending 2% of national GDP on defence, NATO members in their upcoming summit will very likely raise the guideline spend to 3.5%, and potentially up to 5% based on major members’ demands, says Tom Wickenden, investment strategist at ETF specialist investment platform Betashares.

Leading European economies, including Germany, have already signalled their intention to raise their defence spending, at least in principle, to 5%, with France and the UK separately committing to significant increases, hinting towards 3.5%.

A 3.5% commitment equates to a collective spend of more than US$703 billion by EU NATO members, up from US$380 billion in 2024; a 5% commitment would see a collective $1 trillion spent.

However, Wickenden notes that this 5% of GDP target is likely unachievable for less fiscally sound members of the bloc. Instead, compromises are being sought, including a proposal to split the 5% commitment to a 3.5% spend on traditional defence, with the remaining 1.5% allocated towards ‘defence-related’ infrastructure.

“Higher government spending on defence and infrastructure could unlock European manufacturing capacity to a new purpose, with greater innovation, having a lasting positive impact following decades of underwhelming growth,” he said.

Defence stock boon

Defence investors have responded with overwhelming bullishness to the NATO commitments, significantly upping their investments in defence-focused funds.

For Wickenden, this unprecedented level of spending “cannot be understated”, leaving “plenty of room left for defence stocks to rally”.

Globally, defence ETFs now hold US$31.9 billion in funds under management (FUM), according to Betashares and Bloomberg data, with a US$7.5 billion increase in net flows since the beginning of 2025, representing a 24% jump in FUM.

Locally, Betshares’ own ASX-listed defence ETF (ARMR) has seen $75 million in inflows since launch in October 2024, with the ETF specialist hailing it as one of the most successful ETF themes to launch in Australia in recent years.

“Defence stocks, particularly those in Europe, have been on a tear,” Wickenden said.

He cited the bullish run of Rheinmetall, an automotive and arms manufacturer and Germany’s largest defence contractor, which this year alone has returned 185% to investors.

While noting that the company’s traditional fundamentals appear expensive, with a forward P/E ratio of 58x, “analysts remain positive on the stock and sector as orderbooks, an indication of the levels of earnings to come over the medium to long term, grow rapidly,” he said.

Investors would also be remiss to ignore the US defence giants, Wickenden said, as the US Administration seeks to catch up with the European rally.

“Firstly, a spending target increase to 3.5% or, as proposed by themselves 5%, would require the US to increase defence spending by approximately US$100 billion to US$500 billion per year – as they currently spend just 3.3% of GDP on defence.

“Further, any trade deals seeking higher levels of US exports to the EU, or elsewhere, could lean heavily on the US’s world-leading defence companies to make up the balance – something we have already seen from Taiwan and India,” he added.

The US Aerospace & Defense sector has bucked the wider market’s static growth over the year to date, returning 17.9% to investors (against 1.0% of the broader S&P 500).

Betashare’s own Australian-domiciled Global Defence ETF (ARMR) has delivered an impressive 34.8% over the last six months (in line with the sector benchmark of 35.1%). The fund was launched in October 2024.