Trump’s call for a US$1.5 trillion FY2027 defence budget – the largest proposed increase in more than 70 years – has reshaped market expectations around defence ETFs.
ETF provider Global X notes that 2026 will be driven by a wider set of factors as the story now prominently includes the United States.
“Recent operations in Venezuela and earlier in Iran highlighted pressure on inventories and the rising dependence on precision weapons, ISR platforms, electronic warfare systems and space-based capabilities. These requirements point to a multi-year investment cycle rather than a single fiscal year uplift,” senior investment expert Billy Leung said.
Australian-traded defence ETFs reached over $550 million in funds under management as of November 2025, according to Betashares, ASX and Cboe data, with over $450 million in inflows recorded during 2025.
Over one year to 9 January, the Global X Defence ETF (DTEC) has returned 84.1 per cent while the Betashares Global Defence ETF (ARMR) has returned 61 per cent over the same period, according to the ASX.
Global X said DTEC is well positioned with its portfolio including European primes with expanding order books, US contractors linked to missile and munitions capacity expansion, aerospace suppliers with stable multi-year demand, and Asian exporters with increasing international pipelines.
DTEC ended 2025 as the best-performing defence ETF in Australia, supported by this rising European defence spending, expanding order books, and a broad recovery across core defence, aerospace, and munitions suppliers. Much of the environment driving 2025 performance was primarily European in origin, it said, flagging a 49 per cent rise for British defence firm BAE Systems which is a 6 per cent holding in the ETF.
“That momentum has carried into the new year. The fund is up 8.2 per cent year-to-date across the first five sessions, and 48 of its 49 constituents are already positive, with the strongest stock move close to 49 per cent. The early strength again reflects a combination of hardware, electronics, missiles, sensors, and regional exporters rather than reliance on any single name,” Leung said.
“BAE, in particular, saw meaningful expansion in long-dated contracts as governments committed to more structured replenishment and modernisation programs.”
Away from pure defence plays, Leung observed that Korean defence companies have been a notable source of market strength with the iShares MSCI South Korea ETF (IKO) being among the best-perfoming ETFs in 2025 with gains of 81 per cent.
While not a pure defence ETF, its holdings include companies involved in arms exports and defence technology, which benefited from broader market uptrends.
“Hanwha Aerospace, LIG Nex1, Hyundai Rotem, and Korea Aerospace all moved higher as the US operation in Venezuela renewed concerns about missile inventories, strike aircraft capacity and electronic warfare needs,” he said.
“These companies supply core systems in guided weapons, armoured vehicles, aerospace platforms and high-end defence electronics, so they tend to respond quickly when global tensions rise. Korea’s defence export programme is now close to US$17 to 18 billion a year, supported by long-term contracts with Europe, the Middle East and ASEAN.”
Leung said the semiconductor cycle was another key driver behind IKO’s performance with Samsung Electronics and SK Hynix both being South Korean companies as well as smaller suppliers linked to memory technology and storage demand.
“For IKO, the move reflects two separate forces working together: a clear uplift in defence exporters following recent geopolitical events, and a strong rebound in the semiconductor cycle that has supported the broader Korean equity market.”
Global X highlighted that Asia continues to deepen its role in global defence markets, with Korea’s defence export programme expanding from roughly US$7-8 billion to around US$17-18 billion in recent years.
“Contracts with Poland, Romania, the Middle East and ASEAN highlight geographically broad demand, supported by multi-year procurement rather than short-term replenishment. Korea’s role strengthens the view that the global defence cycle is not concentrated in one region,” Leung said.
Global and US defence actions
On 7 January, President Trump unveiled two significant developments for US defence companies: a proposed US$1.5 trillion defence budget for FY2027 – representing an unprecedented ~50 per cent year-over-year increase – alongside the potential for new restrictions on share buybacks, dividends, and executive compensation.
Betashares investment strategist Tom Wickenden noted that while capital return limitations present potential headwinds for defence contractors, the scale of the proposed budget increase is far more impactful.
“If passed by Congress, the proposed spending increase would set a national record and directly address recent investor concerns about defence budget sustainability beyond FY2026 – providing a significant tailwind for US defence companies and keeping positive momentum for what has been a favoured sector for many investors,” he said.
However, Betashares pointed out that Trump’s directive on capital management reflects concerns that defence firms have prioritised shareholder returns over investment, equipment maintenance, and production capacity.
“At this stage, critical questions remain regarding enforceability, with little detail offered by the President. On balance, the supportive tailwinds for the sector across Europe, Asia and the US remain clearly intact for investors,” Wickenden said.
On the Greenland and Denmark situation where the US is seeking to gain sovereignty, Global X’s Leung highlighted how developments have penetrated market areas beyond traditional defence analysis.
“Prediction markets have seen more than US$2.4 million bet on whether the United States will acquire sovereignty over Greenland, with some platforms pricing the odds anywhere from the mid-teens to around 40 per cent depending on how the question is defined (Polymarkets),” he said.
“These contracts rely on simple yes or no outcomes, but the underlying event is complex, which is why traders have focused on wording such as purchase, transfer or control. The attention reflects how unusual the episode is, especially given the White House has said it is exploring multiple pathways to advance US interests in Greenland.”
European leaders have also issued statements affirming territorial integrity. For European defence equities, such headlines tend to reinforce existing trends rather than initiate new ones, as budgets were already rising and order books expanding.
“NATO defence budgets have risen to their highest share of GDP since the early 1990s, with 23 members now meeting or exceeding the 2 per cent benchmark compared with nine in 2020. Several large economies have outlined medium-term spending paths that could rise toward 3 to 3.5 per cent of GDP over the decade.
“This shift has translated into higher demand for missiles, air defence systems, armoured vehicles and related equipment, and has supported multi-year growth in European order books,” Leung said.
