Investing in Europe’s defence: Why an ETF could make sense
Europe has accelerated defence spending in response to geopolitical uncertainty. This is creating opportunities for investors across the defence sector and industries such as next-generation technology. Investing through a diversified exchange-traded fund allows investors to capture the breadth of the possibilities offered by this long-term structural trend.
Europe is undergoing a profound transformation – financially, industrially, and politically. After decades of underinvestment, the continent is now rapidly rebuilding its military capabilities in response to rising geopolitical uncertainty and a reduced guarantee of US protection.
For investors, the result is one of the most significant structural growth stories in Europe today. And one of the most effective ways to seize the opportunity could be through a diversified ETF that aims to capture the breadth of companies involved.
A surge in EU defence spending
European Union member states have dramatically increased defence spending in recent years, and the pace has continued to rise. In 2024, EU defence expenditure reached €343bn, marking the 10th consecutive year of growth. That figure was expected to climb to €381bn in 2025, an 11% increase in a single year and almost 63% higher than in 2020.1
As a share of GDP, defence spending rose to 1.9% in 2024, up from 1.6% the year before, and was expected to have hit 2.1% in 2025. Importantly, investments, not just operating spending, are rising even faster. Defence investment surged by 42% in 2024, reaching €106bn, and was projected to approach €130bn in 2025.
Equipment procurement alone reached €88bn in 2024 and was on track to exceed €100bn in 2025. Research and development spending is also soaring, expected to have climbed from €13bn in 2024 to €17bn in 2025.
The sector’s response has also been robust: the European defence industry had €183.4bn in turnover in 2024, up by 13.8% year-on-year and up by 48% since 2021. Employment rose to 633,000 jobs, up by nearly 9% in a single year.
The message from the data is unmistakable: Europe is rearming at scale, and this is not a short‑lived cycle, but the beginning of a long‑term structural shift.
Why defence spending is set to remain elevated
As geopolitical realities have shifted, Europe has moved toward greater strategic autonomy. With US focus pivoting toward Asia and political signals indicating that American support may not always be guaranteed, European governments have accepted that they must shoulder more responsibility for their own defence.
This means sustained and significant capital commitments. According to think-tank Bruegel, analysts estimate Europe may need to spend €200bn to €300bn more annually for years to rebuild capabilities in areas ranging from ground forces to air defence and naval systems. Backlogs at defence manufacturers already stretch many years into the future, with some shipyards booked up into the 2040s.
Crucially, rebuilding a modern defence capacity is not simply a matter of metal and machinery. It requires next‑generation technologies: semiconductors, advanced sensors, cyber capabilities, and integrated systems. This widens the investment universe to far beyond traditional aerospace and defence names.
- {https://www.consilium.europa.eu/en/policies/defence-numbers/#0; European Council of the European Union}
The rise of defence as a leading ETF theme
This structural shift has not gone unnoticed by investors. Defence‑related investing has rapidly become the dominant theme in thematic ETFs. In 2021 and 2022, flows were concentrated in technology and clean‑energy strategies. Today, the landscape has changed dramatically.
In 2024 alone, defence‑themed ETFs attracted €1.9bn in inflows. In 2025, flows exceeded €10bn, making defence the single strongest thematic trend.
As governments commit to multi‑year spending increases and defence companies report swelling order books, investors are positioning for long‑term growth.
How ETFs can help investors access this opportunity
The defence sector in Europe is not only expanding; it is diversifying. Traditional large defence contractors are seeing their order books surge, while a growing ecosystem of suppliers – component manufacturers, semiconductor firms, cybersecurity providers, and industrial technology companies – is becoming increasingly central to Europe’s defence capability.
Investing through a specialised ETF can offer advantages:
1. Broad exposure to a complex ecosystem
Modern defence is an interconnected value chain. A well‑constructed ETF aims to capture not only pureplay defence firms, but also key contributors in adjacent industries including capital goods, electronics, radar technologies, and advanced materials.
2. Access to a customised benchmark
A passive strategy tracking a customised index such as the Bloomberg Europe Defense Select index captures companies classified under aerospace and defence as well as firms with significant involvement in the defence value chain, even if they fall outside the traditional classifications.
3. Potential risk mitigation in a highly technical sector
Defence companies often have large project‑based revenues and are exposed to geopolitical sensitivity. An ETF aims to diversify these risks across countries, subsectors, and technologies.
4. A long‑term structural trend
With substantial budgets, multi‑year government procurement programmes, and an increasingly coordinated European industrial policy, the investment case is supported by visibility and duration. ETFs are particularly well suited to capturing such multi‑year thematic trends.
What investors should look out for
As Europe builds out its defence architecture, several milestones may confirm the persistence of the trend:
- Continued conversion of orders into revenue across defence manufacturers
- Deeper cooperation between European militaries, including joint procurement
- The emergence of new ‘defence primes’ (manufacturers that coordinate the build of a complete system) as smaller technology firms scale up
- Expansion of domestic capabilities in strategically critical areas such as semiconductors, cyberdefence, and space systems.
In our view, these developments reinforce the case for long‑term exposure through a diversified investment vehicle.
A structural theme with long‑term potential
Europe’s defence landscape is undergoing its most profound transformation in decades. Defence budgets are rising sharply, investment is accelerating even faster, industrial capacity is expanding, and the investor community has recognised defence as a leading structural theme.
Against this backdrop, an ETF that aims to provide diversified, transparent, and cost‑efficient exposure to Europe’s modern defence ecosystem can offer an attractive way to participate in this long‑term trend. As the continent redefines its strategic autonomy, investors have an opportunity to align with one of Europe’s most significant and durable growth stories.
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