Defence budgets are rising at a pace not seen since the Cold War.
Yet for Australian investors wanting exposure to the theme, picking individual defence stocks can be complex, costly, and risky.
The Betashares Global Defence ETF (ASX: ARMR) offers a simpler way to gain exposure to the defence industry in a cost-effective way.
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What ARMR actually holds
ARMR tracks the VettaFi Global Defence Leaders Index, providing exposure to 60 companies that derive more than 50% of their revenues from the development and manufacturing of military and defence equipment and technology.
Critically, the fund only holds companies headquartered in NATO member and major NATO ally countries, including the United States, the United Kingdom, Europe, Australia, Japan, and South Korea.
Top holdings include some of the most recognisable names in global defence: Lockheed Martin, Palantir Technologies, BAE Systems, and Rheinmetall.
In fact, ARMR currently holds 13 of the top 20 defence contractors in the world by defence revenue, giving investors meaningful concentration in the companies that win the largest government contracts.
The performance backdrop
ARMR has delivered healthy returns over the past twelve months, reflecting the extraordinary surge in global defence spending these last years.
However, as Betashares recently noted in its own research, the fund has returned negative 1.8% over the past six months despite the spending environment remaining exceptionally strong.
This has created what the fund manager described as a counterintuitive divergence between the operational backdrop and near-term price performance.
Tom Wickenden, investment strategist at Betashares, said the first 12 days of the US conflict with Iran alone are estimated to have cost the US around US$16.5 billion.
This is a reminder of how quickly modern conflict depletes equipment and drives reordering.
In response, the US is planning a defence budget of around US$1.5 trillion for FY2027, which would represent the most significant year-on-year defence budget increase in history if approved.
The investment case
The case for an ASX defence ETF like ARMR rests on a simple but powerful observation: the shift in global defence spending is not a one-year event.
Europe's defence procurement backlog will take years to clear.
NATO members are only beginning to reach the 2% of GDP spending target.
Australia's own defence budget is expanding under the AUKUS agreement, with the federal government committing to reach 2.4% of GDP within a decade.
For investors who want diversified, low-cost exposure to this theme without the risk of picking individual stocks, ARMR remains the most direct option available on the ASX.
Foolish takeaway
ARMR is not without risk.
Defence spending can be cyclical and the near-term price performance has been softer than the underlying spending environment might suggest.
Nevertheless, for long-term investors who believe elevated defence budgets are here to stay, this ASX defence ETF continues to make a strong case.
