Investors begin to rally to defence stocks as ETFs hit the ASX

Global investors are increasingly turning to defence technology ETFs, attracted by rising geopolitical tensions, technological innovation in warfare, and substantial government defence spending.

Geopolitical uncertainties, particularly in the Indo-Pacific, are prompting governments to ramp up military budgets, creating new opportunities for defence technology companies. China’s growing assertiveness in the South China Sea and escalating tensions surrounding Taiwan have heightened the focus on regional security.

Australia’s geographic proximity to these hotspots, as well as its role as a key US ally, has seen a boost in its own defence initiatives, such as the AUKUS agreement aimed at strengthening military cooperation with the US and the UK.

This combination of geopolitical factors and deteriorating strategic environment has seen the Australian government committing to an increase in Australia’s defence spending, with it tipped to reach AU$100 billion by 2033–24 as identified in the 2024 National Defence Strategy and Integrated Investment Program (IIP).

The Australian government’s 2023 Defence Strategic Review highlighted a significant shift in national security policy, with a focus on advanced military capabilities such as missile defence systems, autonomous vehicles, and cyber security. This is in line with broader global trends where nations are modernising their militaries to face 21st-century threats.

This geopolitical climate has sparked interest in defence technology ETFs, which provide exposure to companies that supply cutting-edge military technologies. For investors, these ETFs offer an accessible way to invest in a sector that is poised for growth, without the need to directly pick individual stocks.

Senior analyst, defence and security at Momentum Media, Steve Kuper said, “We’re seeing the final death throes of the post-Second World War order where Australia, like many nations across the West, enjoyed the benevolence of the United States, it is only natural that now these nations begin to take their defence more seriously, prompting major investments in their national security.”

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The defence industry is being reshaped by new technologies such as artificial intelligence (AI), autonomous systems, satellite communications, and cyber warfare tools. Defence tech companies are leading innovations that are essential to modern military operations, including surveillance systems, UAVs (unmanned aerial vehicles), and AI-driven data analysis tools.

These advancements are crucial to Australia’s future military capabilities, particularly as the geopolitical and strategic environment, both globally and in the Indo-Pacific, continues to deteriorate.

With the AUKUS agreement in place, Australia is set to acquire nuclear-powered submarines and increase its cyber and quantum capabilities – further highlighting the importance of cutting-edge technologies in national security. Investors are now viewing these innovations as long-term growth drivers, with Australian and global defence ETFs holding stocks of major defence contractors like Raytheon, Lockheed Martin, and Northrop Grumman.

“While much of the emphasis of AUKUS has been on the nuclear-powered submarine fleet, and those capabilities, a lot of the real promise of follow-on dual use economic and industrial opportunities and return for investors is in Pillar 2, through the developments in quantum computing, hypersonics and artificial intelligence, which should attract shrewd investors,” Kuper said.

Globally, governments are increasing defence spending to address new-age security challenges. Australia is no exception. In its latest budget, the Australian government announced a significant boost to its Defence budget, with long-term investments in critical technologies and military hardware. This surge in spending is expected to benefit major players in the defence industry.

Internationally, NATO members and other allied nations are also expanding their military budgets, contributing to a steady stream of contracts for defence companies. As governments commit to long-term defence modernisation projects, the defence sector has become an attractive option for investors seeking stable returns.

For context, defence spending globally has seen a 7 per cent increase, worth US$2.43 trillion in 2023, with forecasts of global defence spending tipped to reach US$3.1 trillion by 2030.

Some of the standout funds include Global X, which has top holdings in Lockheed Martin, Raytheon Technologies, Northrop Grumman and Palantir. Betashares which has just listed on the ASX, has over 10 per cent in top holdings in Lockheed Martin, Raytheon Technologies, Northrop Grumman, French-based Safran, and Palantir.

Meanwhile, VanEck has top holdings in Palantir Technologies, Leidos Holdings, Booz Allen Hamilton Holding Corp, France’s Thales SA, and World War Two defence titan Curtiss-Wright.

In a period of global economic uncertainty and market volatility, defence technology ETFs are seen as a defensive play for investors. Historically, defence spending has been relatively immune to economic cycles, driven by the consistent need for national security. In Australia, despite inflationary pressures and economic challenges, defence remains a top priority for the government, ensuring a robust pipeline of contracts for defence contractors.

“As the geopolitical environment continues to deteriorate, we can expect to see continued investment in defence capabilities; investors should double down on their investment in defence innovation, technology because fundamentally, this is about keeping our nation and our way of life safe,” Kuper said.

ETFs, with their diversified exposure to multiple companies, offer investors a way to mitigate risk while tapping into the growth potential of the defence tech sector. As inflation rises, defence companies – backed by large, long-term government contracts – are well-positioned to maintain profitability.

With geopolitical tensions escalating, especially in the Indo-Pacific region, and the increasing importance of advanced defence technologies, global and Australian investors are embracing defence tech ETFs.

As Australia prioritises defence spending in line with global trends, these ETFs provide a compelling investment opportunity. Offering stability in an uncertain world, defence tech ETFs look set to benefit from ongoing government support and the rapid evolution of military technologies.