From taboo to tailwind: The normalisation of defence investing

It only takes a brief glance at today’s papers to see that investors have piled into defence stocks. The Prime Minister stated that we need to “go faster” and “step up” our defence spending, and the markets responded dutifully. By market close, shares in Melrose ended 3.9% higher, Babcock was 3.5% higher, and BAE Systems rose by 3%. 

Across Europe and the UK, defence stocks have become one of the most visible beneficiaries of the post 2022 geopolitical reset. Sector indices tracking aerospace and defence have pushed to fresh highs, while UK defence names regularly feature among the FTSE’s top performers on days when governments signal faster or larger spending commitments. Defence focused ETFs rose into the “most purchased” lists on UK platforms during 2025, as DIY investors sought diversified exposure rather than single stock bets. 

On the trading site eToro, European defence companies are noted among the fastest growing stocks by number of holders in 2025. Names such as Leonardo, Thales, Rheinmetall and BAE Systems all recorded triple-digit growth in retail ownership, placing defence alongside AI infrastructure as one of the year’s defining retail themes. 

Defence is an attractive investment because three drivers converge at once: policy visibility, earnings visibility, and accessibility. Governments have provided unusually clear long-term signals, with NATO agreeing a pathway to spend up to 5% of GDP on defence and resilience by 2035. The UK has also committed to lift spending to 2.5% of GDP from April 2027, and if the Prime Minister is to be believed, this could be just the start. 

This visibility is reinforced at the company level by record order books: BAE Systems entered 2026 with around £78bn in backlog and Rheinmetall with roughly €64bn, giving investors multiyear revenue pipelines rather than short-term, cyclical demand. Finally, the expansion of defence themed exchange traded funds (ETFs) and clearer index classifications has lowered barriers to entry, allowing both retail and institutional investors to add exposure quickly and at scale.

Whilst it’s a surprise to no one that growing geopolitical instability has resulted in a rise in both government and domestic defence investment, what is surprising is that many of these investments are now considered sustainable. 

It used to be that loading your portfolio with defence companies would be considered akin to war profiteering. So, what has changed to the point that even the most morally discerning investors are filling their pockets with the spoils of European militarisation? 

The primary reason for this is one of necessity: we are only a week away from marking four years since Russia’s invasion of Ukraine, and we can no longer rely on military aid from the US in the ways that we used to. As a continent, we need to fund our own defence now, and this can’t all come from government spending. This has shifted sentiment in favour of defence, as the narrative has shifted from an act of aggression to an act of preservation, which is what sustainability is all about. 

Financial policy also supports this. Last year the European Commission explicitly linked defence to number 16 of its sustainable development goals, with its focus on “peace, justice and strong institutions”. It also clarified that the EU’s sustainable finance framework does not prohibit investment in defence.

Since then, we have witnessed a steady rise in defence exposure within Article 8 (the lighter green) funds. Research has shown that defence exposure among these European equity funds has more than quadrupled since 2022. 

Thanks to clear policy commitments, earnings visibility and increased investor access, defence is becoming normalised as a core portfolio allocation. It is no longer just a reflection of rising risk; the changing sentiment and softening of ESG objections show that it is becoming an investment in maintaining the conditions under which European economies and markets can endure.