US investors are seeking to capitalise on a world engulfed in conflict, increasing exposure to the defence industry in a bet on surging military spending in the coming years.
The influx of capital into defence reflects a broader shift in how investors are responding to a more dangerous geopolitical environment. A series of conflicts, from Russia’s full-scale invasion of Ukraine in 2022 to the US-Iran war this year, together with rising western military spending, are prompting investors to treat defence as a long-term theme and channel capital into a sector once out of favour.
“What’s happening over the past year is that we now have a market defined by higher geopolitical risk and less global co-operation, and defence spending has moved from a sort of cyclical trade to something that is more of a multiyear demand story,” said Matthew Bartolini, global head of research strategists at State Street Investment Management.
Annual commitments by US public pension plans to defence-focused private equity funds more than doubled between 2022 and 2025, according to Dakota Marketplace, while commitments to private equity overall fell 2 per cent over the same period.
The trend has continued into this year, with commitments to defence-focused funds rising at a double-digit pace in the first quarter, even as allocations to the broader private equity market continued to decline, according to an FT analysis of public data.
Meanwhile, US-listed defence-focused exchange traded funds reported net inflows of $4.8bn in the first quarter, up from $283mn a year earlier and outflows of $0.15mn two years ago.
Investors are confronting a world shaped not only by wars already under way but the prospect of more cataclysmic conflicts on the horizon. The risk of a direct Russia-Nato confrontation, a crisis over Taiwan involving China and potentially the US, and a broader regional escalation in the Middle East have reinforced the view that higher military spending may prove structural rather than cyclical.
“The world has undeniably become more violent and disorderly. Indeed, the number of armed conflicts is now at its highest since the end of World War II,” the Council on Foreign Relations said in a report in December. “The United States is uniquely exposed to the growing risk of armed conflict.”
For years, investors had been wary of defence investments because of the industry’s moderate growth and its perceived conflict with environmental, social and governance standards.
Julian McManus, a portfolio manager at Janus Henderson Investors, said leading defence companies, such as BAE Systems, for a long time had a reputation for being “a sleepy, slow-growing, low-margin business” and were also weighed down by ESG concerns.
“The prevalent thinking in the ESG-dedicated community three to five years ago was that all defence was bad and was sort of uninvestable from an ESG perspective,” he said.
Global instability had increased “dramatically” over the past few years, making spending on defence and national security more of a “necessity”, said Kirk Konert, managing partner at AE Industrial Partners, a Florida-based, defence-focused private equity firm.
Europe’s defence spending jumped 60 per cent between 2020 and 2025 as the continent stepped up its rearmament. The US has gone even further, with the White House requesting $1.5tn for the military budget for 2027 in early April, up from $901bn this year.
The boom has fuelled a rally in both public and private markets. The benchmark S&P Aerospace & Defense Select Industry index has gained 142 per cent since Russia’s full-scale invasion of Ukraine in 2022, compared with a 64 per cent rise in the S&P 500 over the same period. Meanwhile, Anduril Industries, a defence start-up known for designing AI-powered autonomous weapons and surveillance systems, has seen its valuation soar from $14bn to $60bn over the past two years.
“It’s been a rewarding and fast-moving market to invest in,” said Konert.
At the same time, the waning influence of ESG, hastened by the Trump administration’s assault on the theme, has made investors less hesitant about entering the defence industry despite concerns that such exposure could conflict with those principles.
“ESG has been so beaten up over the past two to three years in the United States,” said Paul O’Brien, a trustee at the Wyoming Retirement System, adding that defence investment is now increasingly seen as “a social good, not a social bad”.
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The influx of capital has also helped defence-focused investment managers raise larger funds. Arlington Capital Partners, a defence-sector private equity firm, raised $6bn for its latest fund in October, up 57 per cent from its predecessor, with commitments from close to a dozen public pension plans.
Rene Reyna, head of thematic and speciality ETF strategy at Invesco US, said the asset manager’s Aerospace & Defense ETF had grown to $8.4bn from $653mn since 2022, largely because of strong inflows. He added that he had seen “a lot of inquiries” in recent months from institutional investors about its defence ETF strategy.
Some investors warned that defence valuations were rising rapidly and risked becoming overheated.
Reyna said defence stocks “appear overvalued on a growth-adjusted basis”, helping to explain a recent pullback in prices.
Konert also warned against “just chasing the hottest deals at the highest prices”.
Others argue that while defence may offer attractive returns for investors, it contributes less to the broader economy than capital invested in revenue-generating infrastructure or technology.
“You could contrast that with money going into a data centre, which produces revenue and output that help the economy,” said O’Brien. “Whereas you buy your nuclear submarine, missile or aircraft carrier, and it just sits there and you hope you never have to use it.”
