What investors should consider before investing in defence ETFs

The surge in defence investing demands more scrutiny

Investor interest in defence has surged. Since February 2022, net inflows into defence-focused ETFs within Europe have topped $17 billion, with $11 billion worth of inflows in 2025 alone.[1] As the geopolitical environment has become more unpredictable, governments have had to rapidly increase their defence and security spending. Defence-focused ETFs offer investors a diversified way to access this.

But not all defence ETFs are the same. ETFs can differ materially in their geopolitical exposure, sensitivity to defence spending, concentration, and alignment with how warfare is evolving.

In the below paper we will highlight five questions investors should consider before allocating to a defence ETF:

1. Is my defence ETF geopolitically aligned?
2. Am I getting exposure to the evolving nature of defence?
3. Is my defence ETF too concentrated?
4. Is my defence ETF truly “pure play”?
5. Does it matter if the ETF issuer is part of a US company?

1. Is my defence ETF geopolitically aligned?

Defence is a politically sensitive sector.  Defence companies primarily sell their equipment to the militaries of the countries in which they are based. At the same time, overseas sales are tightly regulated. Governments can veto the sale of weapons and military technologies if they are destined for countries deemed hostile, politically sensitive, or at risk of using those products in ways the exporting country does not accept. Many governments also restrict or ban the production and sale of certain weapons deemed controversial.

Investors in defence may therefore ask themselves the following questions about the defence companies they own:

• Could they be supplying states that are hostile to, or in conflict with, my own country?
• Do they operate within jurisdictions with credible and trusted export-control systems?
• Am I exposed to sanctions risk, particularly where companies may be supplying countries in conflict with the US, which sits at the centre of the global sanctions system?
• Are they involved in controversial weapons?

A way to mitigate this risk is through geopolitical screening.

A NATO-based screen is a clear example. The Future of Defence UCITS ETF (ticker: NATO) screens for companies domiciled in NATO member states and countries designated by the US as Major Non-NATO Allies (“NATO+”). The Future of Defence Screened UCITS ETF (ticker: NATE) takes a stricter approach, limiting exposure to NATO members only, while the Future of European Defence UCITS ETF (ticker: ARMY) focuses specifically on European NATO countries, and Future of US Defence UCITS ETF holding exclusively US defence stocks.

This matters because NATO is a defensive alliance. Countries within this framework are unlikely to allow their defence industries to export equipment to states that are hostile to NATO members. A NATO screen therefore, helps reduce the risk of investors being exposed to companies whose exports run counter to the strategic interests of the alliance.

It also adds to the growth story. NATO members have committed to significantly increasing defence spending, while other US-aligned countries are moving in the same direction.

For regional exposures outside the North Atlantic, the approach is less straightforward, as there is no direct NATO equivalent. In these cases, exclusion-based approaches can be used. The Kotak Indo-Pacific Defence UCITS ETF (ticker: QUAD), for example, focuses on the region while excluding China, which is the major regional defence producer most exposed to geopolitical risk.

2. Am I getting exposure to the evolving nature of defence?

Many defence ETFs remain anchored in a legacy view of the industry, being heavily weighted towards large primes focused on traditional platforms such as aircraft, ships, and armoured systems. These remain critical, but they no longer define modern defence.

Modern conflict is increasingly shaped by:

• Drones and autonomous systems
• Cyber warfare and digital infrastructure
• Electronic warfare

Modern militaries run on data. Command and control, logistics, targeting, and intelligence are data and software dependent. If the data layer is compromised, the system fails. Cyber security is therefore a core part of defence capability, not an adjacent theme.

This is now reflected in policy. NATO’s updated spending framework includes 3.5% of GDP on core defence, with a further 1.5% explicitly allocated to areas including cyber defence and critical infrastructure.[2] Cyber is therefore structurally linked to rising defence budgets.

Despite this, most defence ETFs have very limited exposure to cyber security, being dominated by traditional industrial names. In practice, this means investors may be missing a key part of where increased defence spending is being directed.

Source: VettaFi; 20.04.2026. Average of technology sector exposure among the five largest UCITS ETFs aimed at providing global defence exposure.

A more forward-looking approach includes cyber as part of the defence value chain. In HANetf’s range of defence ETFs, this is reflected through the inclusion of cyber security companies with verified contracts with NATO member states, ensuring the exposure is directly tied to defence demand rather than broader technology markets.

3. Is my defence ETF too concentrated?

Some defence indices are dominated by a small number of large companies, while also being dominated by a single country – usually the United States.

This creates two layers of risk:

• Single-name concentration – performance driven by a handful of primes
• Country concentration – heavy reliance on US defence policy

Market-cap weighting tends to reinforce this, as huge US companies dominate due to scale and liquidity. But a key trend in defence is the increase in spending outside the US, as Washington pushes for greater burden sharing among allies, alongside a push towards greater domestic or regional sourcing. Europe and Asia in particular are seeing a rapid uplift in defence budgets. A global defence allocation that is heavily US-weighted risks missing this shift.

Capping methodologies can change the outcome:

• Stock caps (e.g. 5–10%) reduce reliance on individual companies
• Country caps prevent overexposure to a single market

This potentially allows for broader participation in global defence growth, with increased exposure to regions where spending is accelerating.

This is reflected in HANetf’s defence range. The Future of Defence UCITS ETF (ticker: NATO) applies a 60% cap at the country level, alongside a 5% cap on individual holdings, helping to limit both country and single-name concentration.[3]

The Future of European Defence UCITS ETF (ticker: ARMY) takes a different approach, with a 10% cap for pure-play companies and 5% for less pure-play exposures. This allows the ETF to reduce concentration while maintaining a high level of thematic purity. The same framework is applied in the Kotak Indo-Pacific Defence UCITS ETF (ticker: QUAD).[4]

Without these types of controls, investors may believe they are accessing global defence, but are in reality making a concentrated bet on US primes.

4. Is my defence ETF truly “pure play”?

Many companies classified as “Aerospace and Defence” generate a significant portion of their revenues from the sale of commercial aircraft or other unrelated business lines.  As a result, some ETFs can include companies with only limited exposure to defence revenues. This dilutes the link between portfolio performance and defence spending.

To address this, investors should consider if the defence ETF they are considering has a revenue purity screen. This helps create a “pure-play” approach, helping to ensure stronger sensitivity to defence budget and reduced dilution from non-defence activities.

In the Future of Defence UCITS ETF (ticker: NATO), a minimum 50% revenue threshold is applied for defence industrial companies. This avoids including aerospace companies where the majority of revenues come from commercial aircraft rather than defence.[5]

The Future of European Defence UCITS ETF (ticker: ARMY) and the Kotak Indo-Pacific Defence UCITS ETF (ticker: QUAD) take a tiered approach, owing the smaller universe of stocks available. Companies with higher levels of defence revenue are treated as pure-play and are given higher weight caps, while less pure-play companies are included with lower caps. This allows the ETFs to maintain exposure breadth without diluting the core defence theme.

In the case of the Drone UCITS ETF (ticker: DRON), a stricter approach is taken, with a minimum of 80% of the portfolio allocated to pure-play companies.[6] This reflects the more targeted nature of the theme.

These approaches ensure that exposure remains closely tied to defence activity, rather than broader industrial or aerospace cycles.

5. Does it matter if the ETF issuer is part of a US company?

Most ETF investors do not spend much time thinking about where their provider is headquartered. In most sectors, that may not matter. In defence, it potentially does.

As mentioned before, defence is a politically sensitive industry. As a result, the regulatory and political framework in which an ETF issuer operates may have implications for how products are structured and how exposures evolve over time.

The United States has a long history of applying financial and regulatory rules beyond its borders. Investors may therefore consider whether US regulatory priorities could, over time, affect products offering exposure to sensitive areas such as defence.

A European issuer operates within a different framework.

For European investors, this can potentially offer:

• Closer alignment with European defence and industrial policy
• Reduced exposure to potential US regulatory spillover
• A more regionally aligned approach to defence investing

This is particularly relevant in the current environment.

At the same time, Europe is placing greater emphasis on strategic autonomy – not just in military capability, but in industrial capacity and financing. Capital markets are part of that process. If Europe is to build its own defence base, it also needs to support it with its own financial infrastructure. Investors looking to align with this may instead prefer to gain their defence exposure through an ETF issued by a European headquartered company.

HANetf is a European issuer with operations in both the UK and EU. Its defence ETFs are structured within European regulatory frameworks and are independent of US regulatory oversight