What are defence stocks? Old primes, new defence-tech, and how they fit a portfolio

Global military spending reached a record US$2.89 trillion in 2025, the highest level ever recorded by the Stockholm International Peace Research Institute (SIPRI) and an 11th consecutive year of growth. That sustained rise in government budgets has drawn investor attention to the companies that build military equipment, from fighter jets to autonomous drones.

This article treats “defence stocks” not as a single trade but as two distinct groups. On one side sit the traditional primes: capital-intensive manufacturers with multi-decade contracts and large order backlogs. On the other sit newer defence-technology firms built around software and autonomy. The distinction is not too dissimilar from the one existing in the healthcare sector between traditional multinational pharmaceutical companies and high-growth biotech companies. 

We explain what defines a defence stock, how the old and new segments differ, why the sector has attracted capital, the risks involved, and how investors in Singapore may access it as part of a diversified strategy.

What counts as a defence stock?

A defence stock is equity in a company that develops, manufactures, or services military capability. Index providers classify most of these firms within the aerospace and defence industry, part of the broader industrials sector under the Global Industry Classification Standard (GICS).

One distinction matters at the outset: pure-play defence versus diversified aerospace. Some firms earn almost all their revenue from defence, such as Lockheed Martin and Northrop Grumman. Others straddle commercial aviation and defence, such as RTX, Boeing and Airbus. This matters because commercial-aviation cycles and government-budget cycles do not move together.

The sector also spans several sub-segments: platforms (aircraft, ships, and land vehicles), munitions and missiles, electronics and sensors, cyber-defence, space systems, and unmanned or autonomous systems. A defence “stock” can therefore mean very different businesses with very different risk profiles.

How do traditional primes differ from new defence-tech?

The “old” industry is built around the primes, the large integrators that assemble complete platforms. Their business model rests on long-duration government contracts, large order backlogs, and high barriers to entry. A backlog is the value of contracted work not yet delivered, and it gives these firms unusual revenue visibility.

The scale is considerable. Lockheed Martin reported a year-end order backlog of US$194 billion for 2025 in its annual report, with potential tailwind from the US-Iran war still to be accounted for. RTX reported a record total backlog of US$268 billion, and Northrop Grumman a backlog of US$95.7 billion, both for 2025.

Europe hosts its own primes: BAE Systems in the United Kingdom, which reported record 2025 sales of £30.7 billion and an order backlog of £83.6 billion; Rheinmetall in Germany; Thales in France; Leonardo in Italy; and Saab in Sweden. Asia is represented by Hanwha Aerospace and Korea Aerospace Industries in South Korea, and Mitsubishi Heavy Industries in Japan. Closer to home, ST Engineering reported 2024 revenue of S$12.35 billion and an order book of S$28.5 billion, with defence and public security its largest segment.

The “new” industry is defence-technology. These firms are software-centric, sell on faster procurement cycles, and are often venture-backed and dual-use. Palantir’s revenue for the year ended December 31, 2025 was approximately US$4.5 billion, up 56% year on year. Many pure defence-tech firms remain private, however. Anduril raised US$5 billion in May 2026 at a reported US$61 billion valuation, but public-market investors cannot buy it directly.

For investors, it is important to know that the “primes” are priced largely on contract backlogs and earnings visibility. Defence-tech is priced on growth expectations, which means greater sensitivity to changes in valuation multiples, and much of the segment sits outside listed markets altogether.

Why has the sector attracted so much capital?

The immediate driver is global defense spending, which is increasing at unprecedented pace, driven by geopolitics and increasing multipolarity. SIPRI reports that world military expenditure rose 2.9% in real terms in 2025 to US$2.89 trillion, an 11th consecutive annual increase and 41% higher than a decade earlier. The United States remained the largest spender at US$954 billion, roughly a third of the global total, even as its own spending fell 7.5%. European spending rose 14%, led by Germany, now the fourth-largest spender worldwide.

Policy has reinforced the trend. At the June 2025 Hague summit, NATO members agreed to target 5% of gross domestic product (GDP) on defence and broader security by 2035, split between 3.5% for core defence and 1.5% for security-related investment such as cyber and infrastructure. That more than doubles the previous 2% guideline. Closer to home, Singapore raised its own military spending 6.4% in 2026, to US$19.7 billion.

The causal chain runs from budgets to earnings. Higher appropriations flow into multi-year contracts, which expand order backlogs, which in turn support revenue visibility for the primes. This is why sector indices have performed strongly. The S&P Aerospace & Defense Select Industry Index, which several exchange-traded funds (ETFs) track, delivered strong returns over 2023 to 2026 (see chart below). Those returns reflected backlog growth and budget visibility rather than any guarantee of future gains, and past performance is not necessarily a guide to future performance or returns.

What are the risks of investing in defence stocks?

The first risk is customer concentration. Defence revenue depends heavily on government budgets, which are set through political processes and can be delayed, cut, or redirected. A single customer, or a single programme, can shape a company's fortunes.

The second is execution risk. Fixed-price development contracts can generate large losses when programmes run over budget. Boeing's defence, space, and security unit posted an operating loss of US$5.4 billion in 2024 on charges tied to such contracts. The numbers have since improved, but they are a reminder that defence is not uniformly profitable and can be heavily dependent on large projects working on schedule.

Further risks include export controls, where arms-export licensing can limit and delay sales; valuation, since the sector trades above its long-run averages and defence-tech names higher still; and environmental, social, and governance (ESG) and reputational considerations, discussed below.

The final risk is cyclicality. Because demand is tied to geopolitics, sentiment can reverse, although geopolitical risk buildup tends to happen gradually—rather than flare up—and defense spending increases typically add geopolitical risk rather than reducing it. 

How does ESG screening treat defence stocks?

While “negative screening” has become less central in the debate about sustainability—which is now rather tied to risk management, and no longer connected to the type of industry a company is in—many funds still apply ESG screens (what are typically known as negative screens) which exclude weapons manufacturers outright.

A distinction has since emerged between prohibited or “controversial” weapons, such as cluster munitions and anti-personnel landmines, which international conventions cause most funds to hard-exclude, and conventional defence, which a growing number of frameworks treat differently.

European rules shifted in 2025, with more attention to “material” risk management. The European Commission clarified in June 2025 that its sustainable-finance framework is sector-neutral toward defence, and a delegated regulation adopted in December 2025 narrowed the exclusion in certain EU benchmark rules from “controversial” to “prohibited” weapons, applying from 30 June 2026. In practice, this has begun to reopen conventional defence to some ESG-labelled funds, though individual fund policies still vary widely. Screened products exist for values-sensitive investors, including versions of defence ETFs that continue to exclude controversial weapons.

How can investors in Singapore access defence stocks?

The most common route is a thematic ETF. US-listed options include the iShares U.S. Aerospace & Defense ETF (ITA), the Invesco Aerospace & Defense ETF (PPA), and the SPDR S&P Aerospace & Defense ETF (XAR), while the Global X Defense Tech ETF (SHLD) tilts toward the newer technology segment.

For investors based outside the United States, Undertakings in Collective Investment  in Transferable Securities (UCITS)-structured ETFs may be more suitable on tax and estate-planning grounds. The HANetf Future of Defence UCITS ETF and the VanEck Defense UCITS ETF are two examples. Some ETFs carry additional screens that exclude controversial weapons. Investors seeking direct local exposure may also consider ST Engineering, which is listed on the Singapore Exchange (SGX: S63).

Each route involves a trade-off. Individual stocks give targeted exposure but concentrate risk in single programmes. Thematic ETFs diversify within a narrow and volatile sector. Actively managed funds add manager judgment, along with higher fees. The named products above are illustrative and would require review before any investment decision.

Investment implications

The most important point on the topic of diversification is that a globally diversified equity portfolio likely already holds many of the largest defence companies. GE Aerospace, RTX, and Boeing sit within the S&P 500; BAE Systems, Rheinmetall, and Safran sit within different European indices. Adding a dedicated defence ETF would therefore be a potential overweight on top of exposure an investor most likely already holds.

Private market exposure—to early-stage companies such as Anduril or Helsing—would be typically obtained through private equity and venture capital fund managers, and would be generally reserved for institutional or accredited investors. 

Overall, a disciplined approach would be to approach defence as a measured satellite tilt, sized deliberately, within a diversified core. The theme's high correlation with broad equities—especially industrials—also limits its value as a diversifier. 

It should be clear that government defence spending—which underpins overall sector growth—is particularly sensitive to the geopolitical climate. On the one hand, structural drivers such as rising budgets and multi-year backlogs may support the sector over a long horizon—military buildup, as stated, is gradual but steady once policy consensus is there. On the other hand, the theme is cyclical, and the strong recent returns may raise the risk of buying after a re-rating. For investors using Endowus, our advisers can help determine whether, and how much, defence or thematic exposure is appropriate for your goals, time horizon, and risk profile.

Frequently asked questions

What are defence stocks?

Defence stocks are shares in companies that develop, manufacture, or service military capability, such as aircraft, ships, missiles, sensors, and increasingly software and autonomous systems. Most traditional companies are classified within the aerospace and defence industry under the GICS framework.

What is the difference between traditional primes and defence-tech companies?

Primes are large integrators, such as Lockheed Martin, BAE Systems, and Rheinmetall, that build complete platforms under long government contracts with large order backlogs. Defence-tech firms, such as Palantir, are software-centric and faster-growing, and many, such as Anduril, remain privately held and inaccessible to public-market investors.

Are defence stocks a good investment?

Defence stocks have delivered strong recent returns, driven by rising military budgets and growing order backlogs. They also carry concentration, execution, valuation, and geopolitical risks, and the sector is cyclical. Whether they suit you depends on your investment horizon, risk tolerance, and existing portfolio. Past performance is not necessarily a guide to future performance or returns.

How can I invest in defence stocks from Singapore?

The most common route is a thematic ETF, such as US-listed ITA, PPA, or XAR, or UCITS-structured alternatives that may be more suitable for non-US investors. ST Engineering offers direct local exposure on the SGX. Individual stocks, thematic ETFs, and actively managed funds each involve different trade-offs between targeted exposure, diversification, and fees.

Do ESG or sustainable funds exclude defence stocks?

Many have historically excluded weapons manufacturers as they used a strategy called “negative screening.” Most recently, the ESG/sustainable theme has moved past negative screening to become sector-agnostic, while focusing on risk management. European rules shifted in 2025 to treat conventional defence more neutrally, but screened products that exclude controversial weapons are available for values-sensitive investors.