As defence spending ramps up, here's where investors see opportunities

Globe and Mail

27-05-2025

As global instability deepens, a new wave of defence spending is capturing investors' attention.
Driven by renewed U.S. pressure on NATO allies to meet spending targets and the planned US$175-billion 'Golden Dome' missile defence initiative, nations once reluctant to boost defence budgets are now investing in military capabilities rapidly. The proposed system to expand continental defence against missile and drone attacks is drawing interest from allies, including Canada.
'There are currently up to 56 major conflicts that are ongoing globally, which is the greatest number of countries engaged in conflict since World War II,' says Alexander Smahtin, portfolio manager at Global X Investments Canada Inc., which recently launched Global X Defence Tech Index ETF SHLD-T.
'We're sort of at an inflection point,' Mr. Smahtin says, with spending likely to increase as geopolitical tensions rise.
Investors are watching the aerospace and defence sector closely for early opportunities.
Petar Pejovic, senior portfolio manager with Wellington-Altus Private Wealth Inc., says the first wave of Golden Dome funding will likely benefit major U.S. defence contractors.
'Ultimately, we're thinking space and we're thinking the big incumbents will likely receive capital first,' he says, citing firms such as Boeing Co. BA-N, Northrop Grumman Corp. NOC-N and RTX Corp. RTX-N.
He also cited Denver-based software company Palantir Technologies Inc. PLTR-Q as a potential beneficiary.
Mr. Pejovic says the Golden Dome initiative marks a new era in military strategy with the emergence of hypersonic weapons and drone warfare. The initiative's first US$25-billion allotment is expected to flow into companies specializing in interceptors, sensors and systems integration, he says.
'We're basically being told that money is being diverted,' he adds, emphasizing that this broader defence rally is likely just beginning. 'As an investor, you should be paying attention to that.'
David Rosenberg, founder of Rosenberg Research in Toronto, says the defence sector is relatively insulated from macroeconomic shocks and policy volatility, with long-term government defence commitments making earnings more predictable.
'This particular sector … is one of the few that has future earnings visibility and is not going to be caught up in a global tariff war,' Mr. Rosenberg says, adding that the opportunities are 'in the early innings.'
Mr. Smahtin also points to portfolio diversification benefits because the defence sector tends to be uncorrelated with other segments of the market.
One of the most notable increases in defence spending is happening in Germany, where Chancellor Friedrich Merz has proposed raising the country's defence budget to 3.5 per cent of gross domestic product. This shift has boosted investor confidence, with German defence firms such as Rheinmetall AG RNMBY and Hensoldt AG HAGHY seeing strong stock gains.
'The fact that the German coalition government made what can only be described as a radical decision to break its fiscal tourniquet and commit hundreds of billions of dollars toward the defence sector is a really big deal,' Mr. Rosenberg says.
He also points to Japan's dramatic military budget increases and highlights that even historically pacifist nations are now making large-scale defence investments.
Despite the sector's momentum, defence investing remains controversial for some. ESG-focused investors often steer clear of arms manufacturers and military contractors, citing ethical concerns.
Mr. Smahtin acknowledges this sentiment, noting Global X designed its ETF to avoid the most contentious areas.
Mr. Rosenberg, however, takes a more direct stance.
'To those people with bleeding hearts, I say, 'It's called defence, not offence,'' he says. 'Imagine if we didn't have a defence to fight World War I and World War II – what the world would look like if we did not have defence?'