As global tensions have escalated in recent years, global defense budgets have grown. This increased spending has drawn interest from investors, but is a robust global defense industry here to stay?
Andrew Ye thinks so. Currently Investment Strategist at Global X ETFs — where he manages 26 ETFs — Ye got his start at Goldman Sachs [GS]. He also worked at Australian wealth management fund Shaw and Partners, where he dealt with security selection, asset allocation and management selection for a $2bn portfolio.
Founded in 2008, New York-based Global X ETFs helps investors access global markets. The investment firm offers a range of financial products spanning sectors such as disruptive technology and commodities, with $97bn in assets under management as of April 2025.
Boosted spending
In 2024, global military spending reached a record high of $2.72trn, with an estimated 2.5% of global GDP dedicated to military expenditure — a major spike for what was, a few decades ago, a relatively slow-moving industry.
Much of this growth has happened in Europe, as three decades of post-Cold War peace allowed European countries to divert defense budgets to other sectors, such as education. In the wake of Russia’s invasion of Ukraine, and with ongoing support from the US no longer a given, many experts are saying the era of the continent’s “peace dividend” are over.
While the Russia-Ukraine war has been a major catalyst, “this trend isn’t just confined to what’s going on in Europe,” Ye explains.
“We’ve seen the US maintain quite a strong allocation towards defense in spite of what else is going on in their government,” Ye adds, with US Secretary of Defense Pete Hegseth proposing a record $1trn defense budget in early April.
Asian countries are also boosting their defense budgets, whether due to tensions surrounding China and the Taiwan Strait, or the recent flare-up of hostilities between India and Pakistan.
With global security less secure than ever, “you are seeing even neutral countries rethink some of their policies.”
Self-reliance
“The defense sector has really been energized on a global scale,” Ye notes. “We’ve seen defense contractors report record backlogs in terms of orders and share prices appreciate in anticipation of higher revenues.”
But an age of shifting alliances, where countries or blocs more often fend for themselves, could create a global defense sector where home-grown alternatives are the norm. “One thing we’re interested in observing is whether there will be separate systems that different countries are able to rely on.”
The EU is, again, a focal point, as the bloc scrambles to find European suppliers of technologies previously provided by US firms — with the search for a Starlink alternative the most prominent recent example. From the European peace dividend, “now we’re seeing this movement toward European resilience”. The proposed Readiness 2030 plan aims to leverage over €800bn in defense spending.
This movement toward self-reliance is boosting the prospects of both pure-play defense firms and consumer-facing companies with related military projects. While “the US has quite a large domestic economy built around the military”, it’s not the only winner in this race, Ye notes. “China, as a result of what we’ve seen over the past 20 to 30 years, has developed an incredible ecosystem as well. A lot of companies, many which are actually consumer facing, are also secretly involved in military projects.”
Will it Last?
“Defense spending has been cyclical in the past,” Ye concedes. For an industry reliant on government contracts, momentum is slow to build, and investors may wonder if countries will continue to focus so much capital on their militaries in the medium to long term.
Conceivably, an easing in global tensions could lead to some budget being cut back. “I think that we could see some governments reallocate some of that spending, particularly if there isn’t an immediate threat,” Ye says.
However, for most of the world, larger military budgets are becoming the norm rather than the exception. In NATO, for example, “the 2% spending target is no longer the upper limit — it’s now seen more as a baseline,” Ye notes, pointing to the “long-term structural changes” in the way the countries approach defense.
In 2014, just three NATO countries spent 2% or more of their GDP on defense. In 2024, that figure had reached 23.
“I think we are seeing increasing willingness and urgency from governments to be able to rearm and develop their own technology going forward.”
How can investors benefit from what looks to be a long-term trend? In Ye’s view, there are two key principles: “First, having a clear strategy, and second, diversification.
“Rather than trying to pick one or two winning stocks, investors could use a defense ETF to gain that exposure… I think this allows investors to capture not just different parts of the value chain, but also access to different geographies as well.”
Understanding how much of your portfolio you want to allocate to defense is another important step. “There might be an argument to overweight it in the current environment,” Ye reckons.
The unique nature of the industry could also provide resilience in case of a larger downturn in consumer sentiment, he explains. “The defense sector as a whole has a relatively low correlation with more consumer-centric themes … naturally, there are diversification benefits as a result of that.”
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