Defence ETF Investment: Is It Smart Investing In 2025? 

Investing in defence ETFs has become increasingly relevant for Indian investors in 2025. With strong government support, rising defence budgets, and global geopolitical shifts, these funds are gaining attention. This blog looks into what defence ETFs are, why they matter now, their benefits and risks, and how you can use them effectively.

What Is a Defence ETF & Why It Matters in 2025 

A defence ETF is an exchange traded fund that invests in companies engaged in defence production, aerospace, military systems, drones, and related services. Here the focus is sector-specific: defence and security industries.

Why It Matters in 2025 

• Government spending: India’s defence budget for 2024-25 is about ₹ 6.21 lakh crore, with major allocations for modernisation and domestic production.
• Industry growth: Crisil projects private defence firms in India to grow revenues 16-18% in FY26, supported by an order book of about ₹ 55,000 crore.
• Exports rising: Defence exports reached ₹ 21,083 crore in FY24, up by 32.5% year-on-year.
• Global demand: International tensions and higher defence spending worldwide have made global defence ETFs perform strongly too.

This combination of domestic policy support and international demand makes defence ETFs a timely investment theme in 2025.

Why Defence ETFs Are a Compelling Choice in 2025 

Here are reasons why you might find defence ETFs compelling:

Strong Growth Potential 

• Companies in defence benefit from long-term contracts, often with government back-orders. When a country modernises its armed forces, or upgrades infrastructure, demand gets built in.
• As noted, private defence firms in India are expected to grow 16%-18% in FY26. 

Alignment with National Priorities 

• The Indian government is emphasising self-reliance in defence (Atmanirbhar Bharat), reducing import dependency, boosting domestic manufacturing. That tends to favour domestic defence companies.
• Defence exports from India are rising: in FY 2023-24 exports reached ₹21,083 crore, up 32.5% year-on-year.

Portfolio Diversification 

• Defence is a sector which does not always move in lockstep with sectors like consumer goods, banking, real estate. There are times when defence stocks perform well even when other sectors struggle (geopolitical stress, etc.).
• By investing via defence ETFs, you spread your risk across many companies in the sector rather than over-exposing to only one.

Relatively Good Risk-Reward in Current Conditions 

• In times of uncertainty such as inflation, global supply chain disruptions, geopolitical risk, defence companies often see increased demand (for specialised equipment, cybersecurity, etc.).
• The performance numbers show that risk of underperformance is present, but many defence ETFs have rewarded investors better than many other thematic or sectoral funds recently. 

Better Transparency & Lower Costs Compared to Picking Stocks 

• Instead of researching many individual defence companies, you get exposure through one ETF. This saves time and reduces selection risk.
• Expense ratios for some defence ETFs in India are relatively low.

Benefits of Defence ETF 

Exposure to a High-Growth Industry 

• You get exposure to both mature defence companies and emerging ones, including in aerospace, drones, cybersecurity, and advanced electronics.
• With increasing government spending, companies that supply defence infrastructure or components stand to gain.

Lower Entry Barrier 

• ETFs allow you to invest small sums (often via lump sum or SIP - systematic investment plan).
• You do not need to pick and monitor multiple individual stocks.

Diversification within the Sector 

• You reduce company-specific risk. Delays in a contract, regulatory issues at one company won’t damage your entire investment as severely.
• A defence ETF will typically include several companies (top holdings are spread) so you benefit from the general sector trend.

Liquidity and Ease of Trading 

• ETFs trade on stock exchanges. You can buy and sell them like any share during market hours.
• You avoid some of the issues of illiquid small defence stocks.

Passive Management & Lower Costs 

• Since many defence ETFs are passive (i.e. they track a defence index) management overhead is lower than that of an actively managed thematic fund focusing on defence.
• Expense ratios in many defence ETFs are modest for the returns (0.40-0.45%) compared to active funds.

Potential Hedge in Uncertain Times 

• In periods of geopolitical instability, the defence sector often sees elevated importance. Investor demand tends to shift towards defence and security related industries.
• That may provide some cushion against downturns in more cyclical sectors.

Understanding the Risks of Defence ETF Investment 

Any investment also has risks. Here are some risks associated with investing in defence ETFs:

Regulatory & Political Risk 

• Defence companies are heavily regulated. Contracts often depend on government decisions, which can change. If a policy shifts, or budgets are cut, it can hurt returns.
• Export controls, international treaties, and geopolitical sanctions can affect companies in overseas exposure.

Concentration Risk 

• Defence ETFs often have a few companies dominating the weight. For example, in the Motilal Oswal defence ETF, the top-5 holdings account for a large percentage (72%-90%) of the portfolio.
• If one large company faces a problem, your ETF’s value can swing significantly.

Valuation Risk & Overheating 

• When many investors begin to pour money into defence ETFs, valuations may become stretched. Stocks may price in expected future growth already, leaving limited room for upside.
• High P/E or forward P/E ratios of defence firms can become concerns if they rise too far above historical norms.

Geopolitical & Supply Chain Risk 

• Even though the defence sector thrives on geopolitical tensions, unstable international relations or trade disruptions can hurt supply chains, affect imports of parts or technology.
• Tariffs, licensing hurdles, technology transfer restrictions may also impact profitability.

Currency & Global Exposure Risk 

• If you invest in global defence ETFs or ones with exposures abroad, currency fluctuations can affect returns.
• Political risk in foreign jurisdictions may reduce the value of overseas assets.

Volatility & Sector Cyclicality 

• Although defence tends to be more stable than some sectors, it is not immune to volatility. Orders may be delayed, budgets may be modified, or technology changes may render certain lines less relevant.
• Often these ETFs are more volatile than broad market ETFs because of narrower exposure.

When & How to Use Defence ETFs 

Knowing when and how to use defence ETFs is important so you can make better investment decisions.

When to Consider Including Defence ETFs 

You might consider them if:

• You anticipate government spending increases in defence due to policy shifts or security challenges.
• You wish to diversify your equity portfolio by adding a sector that does not move precisely like banking, real estate, FMCG, etc.
• You have a medium to long time horizon (3-5 years or more) and are willing to withstand some short-term volatility.

How Much of Your Portfolio Should Be in Defence ETFs 

• Do not over-concentrate in one sector. Many financial advisers suggest sectoral/thematic allocations of perhaps 5-15% of your equity exposure, depending on your risk tolerance.
• If you are more conservative, you might stay at the lower end (5-7%). If you are more aggressive, you might go higher.
• Always consider your overall asset allocation (equity vs debt vs cash) first.

How to Invest 

• Through SIP / Lump Sum: You may use a SIP mode (if your broker / platform allows) or a lump sum investment. SIP reduces timing risk.
• Minimums: Several ETFs allow minimum investment around ₹500.
• Broker / Exchange: These ETFs trade on NSE/BSE. You need a demat/trading account.
• Tracking Error: Check how closely the ETF tracks its underlying index. Lower tracking error is better.
• Expense Ratio: Lower expense ratio means less drag on your returns.
• Hold for Several Years: Since contract cycles, government procurement, policy changes take time, holding for at least 3-5 years helps smooth out volatility.

Tax Implications & Exit Strategy 

• Gains from equity-oriented ETFs in India are taxed according to the latest rules. Short-term capital gains (<1 year) are taxed at 20%. Long-term capital gains are taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year.
• Have an exit strategy: if ETF valuations seem very high, or if government policy shifts away, or if you need liquidity, decide ahead how much gain warrants exit.

Global Perspective: Defence ETFs Beyond India 

Defence ETFs are not limited to India. Globally, several funds track companies in aerospace, defence technology, and military equipment. These ETFs allow investors to gain exposure to international defence firms that may not be listed in India.

One example is the HANetf Future of Defence ETF (NATO), which invests in companies from the US and Europe that supply advanced defence systems. As of August 2025, this ETF delivered a one-year return of about 57.14%, reflecting strong global demand. Another product is the iShares U.S. Aerospace & Defence ETF, which includes major American defence contractors. In Europe, funds like the VanEck Defence UCITS ETF and WisdomTree Europe Defence UCITS ETF provide region-specific exposure.

Global defence spending has risen in recent years, driven by rising geopolitical tensions, cybersecurity needs, and modernisation of armed forces. NATO countries are increasing their budgets, with many committing to spend at least 2% of GDP on defence.

For Indian investors, global ETFs can offer diversification and access to companies not present domestically. However, you should also consider risks such as currency fluctuations, different regulations, and geopolitical factors before investing internationally.

Conclusion 

Defence ETFs in 2025 represent a growing sector backed by national policy and international demand. They provide diversification, exposure to a strategic industry, and potential for strong returns. But they carry sector-specific risks and can be volatile.

If you include them in your portfolio, keep allocations moderate, review valuations, and hold with a long-term perspective. Used carefully, defence ETF funds can be a smart addition to your investments in 2025.

Also Read: https://www.mstock.com/articles/what-is-etf