Defense industry in your pocket: 3 ETFs with exposure to rearmament
The defense sector was supposed to be a sure thing for 2026. Defense budgets are growing across the West, the five-month conflict with Iran has emptied American ammunition stockpiles, and Europe is rearming faster than at any time since the end of the Cold War. Yet the three largest defense ETFs over the past twelve months are lagging the broad market, and all are trading noticeably below their annual highs. Why has the strongest trend of the present not yet shown up in fund performance, and how can you profit from it?
Key points
Defense budgets are growing, conflicts continue, and order books are full. Yet the largest defense ETFs are lagging the broad market. Why?
Three ETFs, one theme, but three completely different investment bets. The differences in their portfolios are much bigger than they appear at first glance.
Buying a defense ETF doesn't necessarily mean buying defense companies. The composition of some funds can fundamentally change the investment profile.
Combining multiple defense ETFs may not give you more diversification. In some cases, you're just buying exposure to the same companies several times.
The sector's biggest problem today may not be demand, but price. The market priced in part of the defense boom long before the profit showed up in results.
The defense sector has one characteristic that other industries don't offer. Its main customer is the state, contracts are signed years in advance, and demand doesn't respond to the economic cycle but to political decisions. That's why over the past three years the defense industry has become one of the most watched topics in the market, and a whole range of thematic funds has sprung up around it.
But 2026 shows the flip side of this story. While the geopolitical situation worsened and the American administration proposed a defense budget of roughly $1.5 trillion for fiscal year 2027, defense stocks reacted surprisingly lukewarmly. Many large defense names traded more than 20% below their spring highs during the summer, and the rally the market expected after fighting broke out in the Middle East never came. The market prices expectations, and after two years of exceptional growth, those expectations were set very high.
For an investor who wants exposure to rearmament in a portfolio without picking individual companies, there are essentially three different paths. Classic American defense and aerospace companies, the European rearmament cycle, or a global basket focused on modern defense technologies.
Which 3 ETFs weakened significantly and are now trading at much more attractive multiples than at the start of the year?