As global conflicts persist and defence spending surges, Australian investors are flocking to defence ETFs, with the Global X Defence Tech ETF (DTEC) emerging as the best-performing ETF of 2025, delivering nearly 60 per cent returns.
At NATO’s June summit, member nations pledged to increase their defence spending target from 2 to 5 per cent – a move that Betashares’ Tom Wickenden predicted would boost inflows into defence ETFs.
DTEC’s performance underscores the trend, with Global X senior investment strategist Billy Leung expecting momentum to continue as NATO members lock in higher defence spending and long-term initiatives in areas such as AI integration and space systems to drive further investment.
“We see defence as a long-term structural growth story. Geopolitical tensions have accelerated spending but governments are increasingly treating defence as non-discretionary,” he told InvestorDaily.
While defence ETFs have performed well across the board, DTEC has outperformed competitors largely due to the performance of its top holding – US software company Palantir Technologies. The company, whose share price gained 134.3 per cent over the year to 15 August, is set to be the best-performing stock in the S&P 500 for 2025.
US President Donald Trump is certainly a fan of the firm, with Palantir enjoying a rather privileged relationship with the President and, in turn, securing multiple government contracts.
At the same time, while Palantir is DTEC’s largest holding at nearly 10 per cent, Leung said the ETF’s performance is "far from a single-stock story".
“The ETF is diversified across 30 to 40 companies and gains have come from broad strength in the sector, with defence budgets rising, NATO members committing more to spending, and significant investment in next-generation areas such as drones, space and cyber security,” he said.
This diversification is precisely the reason Leung is not worried about Palantir’s five-day downturn, which has seen some 9 per cent shaved off the firm’s share price. This setback is not a cause for long-term concern, he said, attributing it to market sentiment rather than underlying fundamentals.
“The pullback reflects profit-taking after a very strong run and broader market scepticism around elevated AI valuations,” Leung said, adding that Palantir actually delivered another strong quarter with nearly 50 per cent year-on-year revenue growth and operating margins in the mid-40s, while also raising its forward guidance.
“From our perspective, the long-term demand for Palantir’s government contracts and enterprise AI capabilities remains intact. Importantly, within the ETF, Palantir is just one of many holdings in a diversified global portfolio,” Leung said.
Speaking to InvestorDaily in June, Leung predicted that cyber security ETFs would also be “standout beneficiaries” of NATO’s defence budget hike, with countries allocating 1.5 per cent of their overall defence spend to address unconventional threats such as cyber security.
However, July saw Global X’s Cybersecurity ETF (ASX: BUGG) become one of the worst performing ETFs that month, declining by 4.73 per cent following the ETF’s 8.2 per cent surge over the six months to June.
Leung said despite this miscalculation, it is important to distinguish cyber security and defence as their performance is driven by different factors, even though both sectors benefit from heightened security needs.
“Defence companies benefit from long-dated government contracts and multi-year budget cycles that provide earnings visibility. Cyber security companies, on the other hand, are more exposed to corporate IT spending, which can be cyclical and recently under pressure,” he said.
Looking forward, Leung said DTEC is seeing demand across all channels, from retail investors through to advisers and institutions seeking to gain diversified exposure to the global defence theme without having to take concentrated single-stock options.
