With nations worldwide increasing military spending, defence has emerged as a significant theme for ASX investors.
While much of the local attention has gone to individual companies such as DroneShield Ltd (ASX: DRO), the real story is the tidal wave of government spending that is fuelling the sector.
Here at home, the federal government has just committed an additional $12 billion to bolster Australia's military capabilities under the AUKUS alliance. This mirrors a global push: NATO members recently pledged to increase their collective defence spend from 2% to 5% of GDP by 2035. In Europe alone, that's an estimated US$324 billion increase.
And it's not just pledges. Order books for the world's largest defence contractors grew by US$119 billion in 2024 — up 17% on the prior year. Companies at the forefront of new technologies, such as Palantir Technologies Inc (NASDAQ: PLTR), are seeing demand accelerate.
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A structural growth story
Defence is increasingly being treated as a permanent priority in government budgets rather than a discretionary expense. This shift suggests the theme is unlikely to fade, even if current geopolitical tensions eventually ease.
At the same time, modern defence spending is no longer confined to tanks and submarines. Software, drones, AI, and cyber technologies are becoming integral to national security. That constant innovation is fuelling strong momentum across the sector, with companies like Palantir soaring more than 370% in the past year while many other defence leaders have also delivered steady gains as higher spending flows through.
Beyond traditional hardware, the sector is benefiting from the rapid digitalisation of warfare, the rise of autonomous systems, satellite and space-based capabilities, and the growing demand for resilient cyber defences. These developments highlight how defence has become a multi-dimensional industry spanning physical equipment, digital networks, and advanced intelligence systems. Together, they point to a long runway for growth as governments prioritise both physical capability and technological superiority in their budgets.
For investors, trying to identify which individual companies will dominate each of these areas is no easy task. This is where ASX-listed defence ETFs can provide diversified exposure to the entire theme, combining established contractors with next-generation innovators in a single investment vehicle.
Top defence ETF options
For investors wanting exposure to this theme, two ASX-listed ETFs have quickly emerged as the standouts.
The Betashares Global Defence ETF (ASX: ARMR) has already surged more than 63% in the past 12 months. Its portfolio spans some of the biggest names in aerospace and defence, including holdings like Lockheed Martin (NYSE: LMT) and Northrop Grumman (NYSE: NOC).
The VanEck Global Defence ETF (ASX: DFND) has delivered even stronger returns, climbing more than 85% in the year since its September 2024 launch. Over half of its companies are based in the United States, with the balance spread across major European allies such as France and Italy, as well as South Korea and other partner nations. Key holdings include Palantir, US missile and aerospace giant RTX Corp (NYSE: RTX), and Italian aerospace and defence group Leonardo SpA (FRA: FMNB).
Both ETFs are designed to focus exclusively on companies headquartered in NATO or allied nations. This ensures investors are gaining access to the core of the global defence supply chain — from traditional hardware like fighter jets, submarines, and missile systems, to advanced software, space technologies, and next-generation intelligence platforms.
Foolish Takeaway
The global defence sector is experiencing one of its strongest periods of growth in decades, underpinned by rising budgets, technological innovation, and ongoing geopolitical risks.
For Australian investors, trying to identify the next DroneShield is a challenging pursuit. However, through ETFs, it's possible to gain diversified exposure to the entire theme — capturing the winners while reducing single-stock risk.
