As governments across Europe ratchet up defense spending, money managers who previously judged the sector too controversial to touch are taking note.
There’s currently a proliferation of portfolios focused on defense assets, with fund tickers such as WAR and NATO doing the rounds. Data compiled by Bloomberg shows the number of defense-themed funds doubled last year to a record 47, following decades during which such products — if they existed at all — were only to be found in the single digits. Data through mid-February indicates the current pace isn’t letting up.
And in a sign of the times, even investors focused on environmental, social and governance (ESG) metrics are now softening once strict exclusion policies to make room for defense assets.
Mia Thulstrup Gedbjerg, who co-heads the defense industry unit at the Danish law firm Kromann Reumert, said it’s as if “D is the new addition to ESG.”
Europe is now racing to respond to the reset in trans-Atlantic relations triggered by President Donald Trump’s return to the White House. Across the bloc, governments are planning major increases to defense spending and discussing new funding models to pay for it.
For investors, the issue of regional security, combined with the likelihood of big returns, is hard to ignore.
“A lot of capital is going to flow into these companies,” Gedbjerg said.
Roel Houwer, senior product manager at VanEck Asset Management, said public opinion around the appropriateness of holding defense stocks is “changing quite a bit.” His firm launched the VanEck Defense UCITS ETF (Ticker: DFNS) in early 2023. It now has well over $2 billion in managed assets, after returning 44% in 2024 alone. So far this year, it’s up 10%.
“We’ve seen tremendous growth,” he said in an interview. And flows into the fund in the first weeks of this year “are even bigger than they were in 2024,” he said. The fund draws between $20 million and $30 million of new money each day, he said.
Some European investors are calling to ask whether VanEck has an ETF of European defense companies, Houwer said. The asset manager has previously considered creating such a product but for now it’s difficult to do because there are so few European-based companies, he said.
“As this industry grows, then obviously the investment possibilities become larger and more companies will meet the size and liquidity requirements to be eligible for a possible European invested index,” Houwer said.
Bloomberg Economics calculates that protecting Ukraine and expanding their own militaries could cost Europe’s major powers an additional $3.1 trillion over the next 10 years. That follows decades of underinvestment, according to a review of EU competitiveness published in September by former Italian Prime Minister and European Central Bank President Mario Draghi.
Europe must make its defense industry more attractive to investors, the Draghi report said. That includes adapting the bloc’s sustainable finance framework to support investments in the industry.
European Union leaders are now discussing joint financing, and EU Commission President Ursula von der Leyen is due to present a comprehensive plan next month that’s set to include incentives for investors.
ESG fund managers that add exposure to the defense sector face considerably better returns than they’ve been able to generate by holding traditional green stocks such as wind and solar.
The S&P Global 1200 Aerospace & Defense Index rose 17% last year and is up 6% so far this year. The S&P Global Clean Energy Transition Index, meanwhile, is little changed this year, after losing 27% in 2024.
Stephan Kippe, head of ESG research at Commerzbank, said “the need to better align sustainable investing with the defense sector seems more urgent than ever.”
Arms manufacturers are “still under-represented in sustainable funds, both through lagging ESG ratings and outright exclusion,” he said in a note.
“However, investor and asset manager attitudes are changing and the EU should assist this momentum with regulatory support.”
