2025 Puts European & Global Defense ETFs on the Map

Globally, consumers have propped up the economy for the past several years. Most of the exciting stories have revolved around either consumer or technology related investments. In the international investment arena — which many U.S. investors still have reluctance to enter — European luxury stocks were an exciting, high-growth story in the years following the pandemic.

But these stocks have started to go “out of fashion” this year as the global consumer shows sign of weakness. Now investors are rotating to an unexpected growth area — European defense. This sector has started to receive global attention (even from the reluctant U.S. investor) as the U.S. experiences a broad equity market pullback. Here’s what investors and advisors need to know about the European defense sector before investing.

Growth in European defense spending has the potential to outpace growth in defense spending in the U.S. over the next few years. Europe has had historically lower defense spending as a percentage of GDP relative to the U.S. But with rising geopolitical tensions and conflicts in areas like Ukraine and Israel, countries have pledged to increase their defense spending. These countries include Germany, the UK, and more broadly, the European Union and NATO. While the absolute figures may remain below those of the U.S., the YoY change (or growth trajectory) is compelling.

It is important to note that while the current market outperformance has been driven largely by sentiment, these trends existed prior to this year. The data below comes from the NATO website. It includes defense spending as a percentage of GDP with estimates for 2023 and 2024. Although these estimates were taken prior to the current defense spending renaissance, there was already an existing trend toward growth for European countries. After recent events in 2024 and 2025, estimates place European defense spending at levels above 3% in the next 10 years. That’s close to a “catch-up” to where we are in the U.S.

Unsurprisingly, the European defense sector saw stock prices pop along with the increase in defense spending estimates. While I initially assumed that the growth would be a short-term rally, the outperformance has been hard to ignore. The Select STOXX Europe Aerospace & Defense ETF (EUAD) is already up 39% YTD relative to the iShares U.S. Aerospace & Defense ETF (ITA B+), which is up only 5.4% YTD. The SPDR S&P 500 ETF (SPY A) is down 5.2% YTD.

But the downfall of many industry-specific and thematic ETFs has been the disconnect between top-line revenue growth and profits. While ETFs often reduce idiosyncratic risks on the profit line by diversifying among several names, profit issues can often be industrywide. In this case, however, the European defense industry had been on relatively strong footing prior to the defense spending rally. Although growth had been muted in previous years, the industry has been on the edge of new technology. It has also been going through a period of consolidation. Consolidation has led to vertical integration, resulting in solid balance sheets and improved operating margins.

But the nature of defense companies — whether in the U.S. or in Europe — has been slow and steady. These companies are typically “defensive” in nature and show resilience through cycles. Even with growth opportunities, these stocks often “pop” with news of geopolitical conflict, and then see prices moderate.

Another caveat to consider is that the industry has been more expensive relative to its U.S. counterparts. These companies have already received higher sentiment on the expectation that increased defense spending will feed into top-line growth. Note that these companies have not yet received funds. So it is unclear where the exact benefits would be distributed. Once these benefits materialize, much of the increase in revenue will likely already be priced into models. Additionally, some may receive lower allocations than expected, which may hit the stock price negatively.

Advisors and investors need to understand that although growth in European defense spending seems certain, its ultimate effect on stock prices could still be uncertain. And while growth may continue to occur, it may not be at the same rate that we have seen so far this year. Nonetheless, the European defense sector is an interesting avenue for investors to capture some international growth exposure (among a more broadly diversified global portfolio).

EUAD is the only U.S.-listed ETF that focuses on the European defense sector. But several other ETFs take a global approach to defense.

• The Select STOXX Europe Aerospace & Defense ETF (EUAD) is the only U.S.-listed ETF focused on the European defense sector. The ETF only contains 13 stocks of European companies that are listed as ADRs. These companies derive at least 50% of their revenues from civil and military defense efforts. The ETF has a heavy concentration to its top two holdings — Airbus (EADSY) and Safran (SAFRY). Together, those two make up 44% of the ETF’s weight. Notably, over 50% of the ETF’s weight is in French companies, followed by 23% in Great Britain, and 16% in Germany. The ETF was launched recently in October 2024.
• The Global X Defense Tech ETF (SHLD B-) is relatively large compared to its peers, with over $1.2 billion in assets. The portfolio is also global and expands the definition of defense to “defense tech.” Defense tech includes other area like cybersecurity, artificial intelligence, and augmented reality. Palantir (PLTR) is this ETF’s top holding, which is generally classified as a technology stock. Out of the three ETFs discussed in this report, SHLD is the oldest — although it launched somewhat recently, in September 2023.
• The Themes Transatlantic Defense ETF (NATO) focuses on aerospace and defense companies headquartered in North Atlantic Treat Organization (NATO) companies. Although the ETF represents NATO countries, 60% of its weight is in U.S. companies. Half of its top 10 holdings include U.S. companies like RTX Corp (RTX), Boeing Co (BA), Northrop Grumman (NOC), Honeywell International (HON), and Howmet Aerospace (HWM). This ETF launched in October 2024, just a few days before EUAD. It is also worth noting that this ETF is 15 basis points cheaper than its peers.
• For more information on U.S. aerospace and defense ETFs, see this note.

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