Defense ETFs Under Spotlight as UK Unveils $20B Military Overhaul

The UK government has unveiled a substantial £15 billion (approximately $20 billion) boost to its defense budget over the next four years as part of the newly published Defence Investment Plan (DIP). This plan will lift Britain’s annual defense spending to £79.1 billion, accounting for 2.7% of GDP, by 2029.

Consequently, U.K. defense giants like BAE Systems BAESY and RollsRoyce RYCEY stand to be primary beneficiaries of this significant fiscal commitment, which will likely bolster their order books and long-term earnings potential. 

The announcement, made by Prime Minister Keir Starmer, immediately caught investor attention, propelling major UK defense stocks to march higher on the bourses on July 1. This, in turn, brought defense exchange-traded funds (ETFs) with exposure to these companies into the spotlight.

Before turning to these ETFs, it is important to understand the U.K.'s role in the global defense landscape and the long-term growth opportunities supporting its defense sector.

The UK's Outsized Role in Global Defense

The United Kingdom is not merely a significant spender but a cornerstone of the global defense ecosystem. It is a top-tier arms exporter in the world, with 2025 recording the highest British defense exports in 40 years, securing more than £20 billion in defense deals. 

Prominent UK defense contractors are at the heart of this success, demonstrating their immense importance through solid backlog counts and strong performances on the bourses. 

BAE Systems, which serves as the strategic anchor of the UK’s defense industrial base and spearheads the next-generation Global Combat Air Programme (GCAP), saw its shares climb 7.3% year to date. The company ended 2025 with a record backlog of £83.6 billion, grabbing £36.8 billion in new orders and witnessing 10% year-over-year sales growth. 

Shares of Rolls-Royce, a key supplier of engines for the RAF's aircraft and nuclear reactors for the UK's submarine fleet, witnessed a 22.2% year-to-date surge. Its defense arm ended 2025 with a £17.4 billion order backlog, which was equivalent to more than three years of revenues, supported by an order intake of £5.5 billion. Underlying revenues for this unit grew 8%. 

Other major players like Chemring Group CMGMY, a direct partner of the UK Ministry of Defence (MoD), known for its air and naval countermeasure equipment, saw its shares climb 14.3% year to date. CMGMY grew its order book in 2025 to £1.3 billion, driven by NLAW anti-tank weapon orders and rising energetics demand. 

Shares of Elbit Systems ESLT, a supplier of cutting-edge defense capabilities like unmanned aircraft systems, advanced electronic warfare suites, battlefield command networks and synthetic training simulators for the MoD, have jumped nearly 32% year to date. It closed 2025 with an annual order backlog of $28.1 billion, reflecting an increase of $5.5 billion from 2024, backed by rising global conflicts and defense budgets. 

This performance underscores a compelling theory: UK defense stocks are not just keeping pace but surpassing their US counterparts, with the FTSE 350 Aerospace & Defense index up by approximately 540% over the last five years, compared to a 120% return for the Dow Jones U.S. Select Aerospace & Defense Index over the same period (as cited in CNBC).

What Lies Ahead for the UK Defense Industry?

The outlook for the UK defense industry has been strengthened by the data-centric vision of the DIP, which is expected to serve as a catalyst for sustained long-term growth. The plan allocates substantial funds to modernize the armed forces, with over £5 billion dedicated to a "drone transformation" and a strategic shift toward autonomous systems, AI, and cyber capabilities. 

This pivot should ensure that the UK defense sector remains at the forefront of next-generation warfare technology, creating a robust pipeline of high-value contracts for innovative companies. 

The latest announced funding boost, which brings total cumulative spending under the DIP to nearly £300 billion by the end of this decade, reflects the UK government’s commitment to long-term investment in defense. This, coupled with a clear trajectory to increase the nation’s defense spending to 3% of GDP in the next parliament, provides a solid foundation for the defense industry’s growth in the coming years.

Defense ETFs Under Spotlight

Against the current backdrop, as mentioned above, for investors looking to gain diversified exposure with minimal risk, defense ETFs offer an efficient route into the entire value chain of the UK defense industry. Instead of selecting individual winners, investors can consider ETFs that hold a basket of these key players, spreading risk while capitalizing on the sector's overall upward trajectory. To this end, three defense ETFs that one may consider adding to their watchlist are:

Global X Defense Tech ETF SHLD

This fund, with net assets worth $7 billion, offers exposure to 50 companies positioned to benefit from the increased adoption and utilization of defense technology. BAESY holds the seventh position in this fund, with 4.44% weightage.

The fund charges 50 basis points (bps) in fees.

Themes Transatlantic Defense ETF NATO 

This fund, with a net asset value (NAV) of $40.62, offers exposure to 85 aerospace and defense companies headquartered in North Atlantic Treaty Organization member countries. RYCEY holds the fourth position in this fund, with 7.15% weightage, while BAESY holds the 10th spot with 3.40% weightage.

The fund charges 35 bps in fees.

Tema International Defense ETF ARMY

This fund, with asset under management worth $5.6 million, offers exposure to 34 innovators at the forefront of defense applications for AI, cybersecurity, robotics, and more — technologies reshaping modern security. ESLT holds the first spot in this fund, with 5.88% weightage. BAESY holds the fourth position in this fund, with 4.40% weightage, while CMGMY holds the fifth spot with 4.24% weightage.

The fund charges 75 bps in fees.  

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This article originally published on Zacks Investment Research (zacks.com).

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