Skip to main content
Insights
4 min read
Rebecca Chesworth
Senior Equity Strategist

European defence: From tactical theme to strategic allocation

Twelve months ago, European defence was a compelling structural theme, supported by a new cohort of UCITS exchange traded funds (ETFs). Today, it has become part of a defining investment cycle.

Geopolitical fragmentation, rising strategic autonomy, and binding NATO commitments have resulted in structurally higher, less cyclical defence spending. This shift reflects a reset in European security priorities, now anchored in long-term policy commitments rather than short-term geopolitical developments.

Despite this backdrop, European defence stocks have delivered more muted and uneven returns over the past 12 months after exuberant gains in early 2025, even as most stocks beat expectations in their latest first-quarter results, building on a year of earnings upgrades.1

Our SPDR S&P Europe Defense Vision UCITS ETF has reduced its total expense ratio (TER) to 0.20 percent, making it the lowest-cost defence ETF in the UCITS market based on headline TER.2 This reinforces its role as a core allocation to the defence theme, rather than a tactical satellite exposure.

European defence spending supported by policy consensus

European governments (both in the European Union and outside) are increasing defence spending materially, driven by legally embedded multi-year national plans and NATO commitments. The growth is durable, domestically sourced, and supported by broad political consensus.

In a precursor to Operation Epic Fury, on 21 June 2025, the United States bombed three of Iran's nuclear facilities. The NATO summit in The Hague the same month, produced the most consequential spending commitment in the alliance's recent history.

  • NATO allies agreed to a new defence investment target of 5 percent of GDP by 2035 (split 3.5 percent for core defence and 1.5 percent for wider security spending including cyber and critical infrastructure). This represents a near-tripling of the symbolic 2 percent guideline that most European members had only recently begun to approach.
  • The centrepiece of European rearmament, Germany's 3.5 per cent target alone would translate to spending of more than €150 billion per year by 2029.Chancellor Friedrich Merz loosened the constitutional debt brake to free up defence spending. This year’s German federal budget earmarks approximately €108 billion for defence,4 with the Bundestag already approving new procurement projects worth billions.
  • France, Estonia, and Italy have also announced new national procurement programmes.

While a significant share of European procurement traditionally has flowed to US contractors, the growing divergence in foreign policy priorities has strengthened the case for onshoring defence capabilities and supporting domestic champions.

As a result, a greater share of defence spending now remains within Europe, creating a more durable and policy-backed demand environment for European-listed defence companies.

US/Iran ceasefire holds; Strait of Hormuz remains severely restricted

A conditional ceasefire between the US and Iran has been in place since 8 April 2026 and has been extended, but the Strait of Hormuz remains severely restricted to commercial shipping. Iran has laid sea mines and the IRGC continues to limit passage. The US has simultaneously imposed a naval blockade of Iranian ports from 13 April 2026. Commercial traffic through the Strait of Hormuz is still far below pre-war levels.

As of this writing, negotiations remain in flux, despite Pakistan’s efforts.

The link between security and energy resilience

The closure of the Strait of Hormuz reinforces the urgency of energy security spending. This is accelerating procurement of naval assets, mine countermeasures, and strategic reserves infrastructure. Also, the willingness of the US to use military force unilaterally, and the European and NATO allies' public refusal to endorse such actions, has reinforced the case for European strategic autonomy.

Beyond the geopolitical implications, the macroeconomic risks are intensifying. The breakdown of the ceasefire or further escalation could deepen the supply shock. While this could hit equity markets hard, defence stocks could remain buoyed by the ongoing conflict, European rearmament, and their relatively non-cyclical demand profile.

The Hormuz crisis underscores how evolving defence needs, from maritime security to low-cost drones, are reshaping where and how capital is deployed. For investors, accessing this structural shift requires exposure aligned with where defence spending is actually concentrated.

The S&P Europe Defense Vision Index is designed to provide deeper exposure to companies where defence is a core driver of revenue, rather than a peripheral business line. By incorporating a defence/revenue exposure score alongside market capitalisation, the methodology tilts the portfolio toward companies more directly aligned with structural defence spending trends.

This approach helps avoid dilution from diversified industrials with limited defence exposure, resulting in a portfolio that is more tightly linked to policy-driven demand and the evolving security landscape.

 

Table 1: Top 10 Largest Index Constituents 

Security name

Fund weight (%)

Country

Industry classification

BAE Systems plc

14.3

United Kingdom

Aerospace & Defense

Rheinmetall AG

13.2

Germany

Aerospace & Defense

Saab AB Class B

9.4

Sweden

Aerospace & Defense

Thales SA

9.1

France

Aerospace & Defense

Leonardo SpA

9.1

Italy

Aerospace & Defense

Rolls-Royce Holdings plc

8.9

United Kingdom

Aerospace & Defense

Safran SA

8.4

France

Aerospace & Defense

Airbus SE

5.5

France

Aerospace & Defense

Kongsberg Gruppen ASA

3.8

Norway

Aerospace & Defense

Babcock International Group PLC

2.7

United Kingdom

Aerospace & Defense

Source: State Street Investment Management. Data as of 28 May 2026.

The State Street SPDR S&P Europe Defense Vision UCITS ETF (DFSV) was launched on 3 June 2025. It tracks the S&P Europe Defense Vision Index with 31 large-, mid-, and small-cap European companies. The fund's TER has been reduced to 0.2 percent from 4 June 2026, making it the cheapest amongst UCITS competitors based on headline TER.5

More on Equities