Important information - the value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
Q: As a long-term investor, should I be considering defence industry shares as part of a diversified portfolio?
A: Defence companies have had an amazing 12 months. The performance of giants like Rheinmetall and Babcock has been particularly striking, but growth has been strong across the board. On average, European defence stocks have doubled in price since the end of 2024.1 Please remember past performance is not a reliable indicator of future returns.
Like you, many investors are now wondering whether to increase their exposure. To answer this, you must first clarify your ethical position. Are you comfortable investing in businesses that manufacture weapons? Then, you need to be hardheaded: have markets got carried away, or are there still opportunities ahead?
The industry’s recent success has been fuelled by a Europe-wide spending spree. EU member states increased defence spending by 63% between 2020 and 2025, amid growing security concerns.2 Many analysts think this will increase further. Afterall, NATO allies have pledged to allocate 5% of GDP to defence and security by 2035.
Investment strategists here at Fidelity have spoken of a “structural upcycle”, arguing that the geopolitical environment has become more fragmented, which will drive up defence budgets. If this assessment is correct, then exposure to the sector could prove lucrative.
However, it is worth paying attention to valuation. European defence companies are now trading on price/earnings multiples similar to those of US tech firms. Earnings growth will have to remain very strong to justify this - or there could be a nasty correction.
Time plays an important role here. Over shorter periods, stocks tend to bounce around, and defence companies in particular can be knocked off course by news events. Towards the end of last year, for example, peace talks between Russia and Ukraine triggered a brief sell-off. You describe yourself as a long-term investor, however, so you may be less worried about bursts of volatility than the fundamental investment case.
Finally, there is a question of how to gain exposure. Thematic ETFs are attracting plenty of interest at the moment. VanEck Defense - which promises “pure-play exposure” to companies involved in the defence industry - was a best-seller last month, and the HANetf Future of Defence also appeared in the top 10 best-selling ETFs of 2025.
You don’t have to take such a targeted approach, however. Aerospace and defence companies represent roughly 7% of the FTSE 100. This means a simple UK tracker fund - such as the iShares Core FTSE 100 - will boost your exposure to key names like Rolls Royce, Babcock and BAE Systems.
Got a burning question you want to ask? Why not drop us a line. Click here to ask your question.
- Read: ISA ideas: low-cost index tracker fund options
- Read: 4 growth funds for your ISA
- Read: Top 10 best-selling ISA and SIPP funds in January
Source:
1 Panmure Liberum, Defence - Europe, 2 February 2026
2 EU defence in numbers, European Council, February 2026
Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. This information is not a personal recommendation for any particular investment. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is no guarantee that the investment objective of any Index Tracking Sub-Fund will be achieved. The performance of the sub-fund may not match the performance of the index it tracks due to factors including, but not limited to, the investment strategy used, fees and expenses and taxes. Reference to specific securities should not be construed as a recommendation to buy or sell these securities and is included for the purposes of illustration only. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.
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