The U.S. stock market is off to a poor start in 2025, with the S&P 500 index and the tech-heavy Nasdaq Composite down 13.4% and 19.1%, respectively, including dividends, as of Friday, April 4.
The stock sell-off is being driven by concern among investors about the potential for the escalating tariff war to increase inflation and slow economic growth in the United States and globally. Last week was the U.S. stock market's worst week since the start of the pandemic in March 2020. President Trump's so-called reciprocal tariffs on imports announced on Wednesday were much steeper than the market, collectively, had been expecting.
What's a growth-oriented investor to do? Some investors might want to consider investing in European defense stocks. Collectively, these stocks have been doing very well in 2025, but more importantly, this space should have good long-term growth potential.
First, let's address why European defense stocks look attractive and then explore a solid option for investing in them: Global X Defense Tech ETF (SHLD +2.72%). In 2025, it's returned 16.7% through April 4.
Data by YCharts. This chart shows that Global X Defense Tech ETF was outperforming the S&P 500 and Nasdaq even before 2025 began.
European Commission President: "Europe is ready to massively boost its defence spending"
NATO (North Atlantic Treaty Organization) members have become increasingly concerned about the U.S.'s commitment to the organization's mission "to guarantee the freedom and security of its members through political and military means." NATO is the world's biggest military alliance consisting of the U.S., Canada, and 30 European countries.
Leaders of European nations have responded by calling for large increases in defense spending by European countries. Ursula von der Leyen, president of the European Commission, the executive arm of the European Union (EU), released a statement on March 3 on the "ReArm Europe Plan." (There is much overlap between European NATO members and EU members.) It reads in part:
We are in an era of rearmament. And Europe is ready to massively boost its defence spending. [Defence is the British-English spelling.] Both, to respond to the short-term urgency to act and to support Ukraine [in its war with Russia, which invaded Ukraine in February 2022] but also to address the long-term need to take on much more responsibility for our own European security. [Emphasis mine.]
Russia's aggression against Ukraine has ignited particularly major concerns among European countries given some of their proximity to Russia.
Why buy a global defense ETF with a significant weighting of European stocks?
U.S. investors should be able to easily buy select European defense stocks, as some of them trade over-the-counter (OTC) in the U.S. However, some of them are only accessible by using foreign stock exchanges, which has drawbacks. The ease factor is one reason to consider buying a European stock-heavy defense ETF rather than an individual European defense stock.
But the biggest reason for considering buying such an ETF is the same one as for buying any ETF: diversification. ETFs are bought and sold like stocks, but their diversification makes them less risky than individual stocks.
Global X Defense Tech ETF: Overview
This ETF began trading in mid-Sept. 2023, and has $861 million in assets under management, as of Feb. 28. (This number has likely increased notably since the last update.) It's an index fund that aims to track the performance of the underlying index, which is "designed to provide exposure to defense technology companies that are positioned to benefit from technology, services, systems and hardware that cater to the defense and military sector."
Global X Defense Tech ETF's stock weights are based on free-float market caps, which are calculated using shares available for trading. Maximum weight is capped at 8%, though a stock could exceed this figure until the weights are reset, which occurs semi-annually, along with any necessary changes to the holdings.
The ETF has 37 stock holdings, as of April 4. Its geographic breakdown: 19 U.S. stocks (about 53% weighting), 11 European stocks (39% weighting), and 7 Asian stocks (8% weighting). The ETF's expense ratio is 0.50%, which is reasonable for an ETF focused on a particular theme.
Why Global X Defense Tech ETF looks attractive relative to other similar ETFs
Global X Defense Tech ETF looks attractive for a few reasons. First, I like its focus on "defense tech" rather than the traditional "aerospace and defense." The latter category of ETFs typically includes some companies whose commercial businesses are larger than their defense businesses, such as Boeing. Global X Defense Tech ETF does not include Boeing because a criteria for inclusion in the fund is that at least 50% of a company's revenue must be derived from sales of products used for defense applications.
And it's a good thing this ETF doesn't include Boeing. The U.S. aerospace giant faces numerous serious legal issues related to a spate of severe safety problems with its commercial aircraft. Its stock has been a laggard for some time.
On the other hand, Global X Defense Tech ETF includes an attractive stock that traditional aerospace and defense ETFs generally do not: Palantir Technologies (PLTR +2.10%). This U.S.-based technology company makes artificial intelligence (AI)-powered software platforms for data analysis. Its defense-related government business (which does work for not only the U.S. government, but also those of our allies) generates more revenue than its commercial business, which allows it to be included in Global X Defense Tech ETF.
Moreover, Palantir's inclusion in the Global X Defense Tech ETF is possible because this fund has a global focus, rather than just a European or international one. Europe-based defense stocks look poised for stronger growth than U.S.-based ones, in my opinion. However, with most generalization, there will be exceptions. I think Palantir will be one of them.
OTC: RNMBY
Key Data Points
Global X Defense Tech ETF: Top 10 stock holdings
|
Holding No. |
Company |
Market Cap |
Weight (% of Portfolio) |
1-Year Return |
5-Year Return |
|---|---|---|---|---|---|
|
1 | Rheinmetall, Germany (RNMBY +2.93%) |
$56.1 billion | 9.20% | 124% | 2,210% |
|
2 | Palantir Technologies, US | $174 billion | 7.97% | 229% | N/A* |
|
3 | RTX Corp, US | $157 billion | 7.01% | 20.9% | 167% |
| 4 | Northrop Grumman, US | $70.3 billion | 6.94% | 7.5% | 68.2% |
| 5 | Thales, France | $52.8 billion | 6.54% | 53.7% | 248% |
| 6 | General Dynamics, US | $67.6 billion | 6.15% | (13%) | 124% |
| 7 | Lockheed Martin, US | $102 billion | 5.74% | (2.3%) | 41.1% |
| 8 | Leonardo, Italy | $25 billion | 5.67% | 76.3% | 580% |
| 9 | Hanwha Aerospace, S. Korea | Approx. $23 billion (based on current exchange rate) | 4.94% | 171%** | 3,382%** |
| 10 | BAE Systems, UK | $57 billion | 4.81% | 18.4% | 280% |
| N/A | Global X Defense Tech ETF | $861 million assets under management, as of 2/28/25. | 100% (Top 10: 65%) | 32.8% | N/A |
| N/A | S&P 500 Index | N/A | N/A | (0.1%) | 120% |
| N/A | Nasdaq Composite Index | N/A | N/A | (2.2%) | 120% |
Data sources: Global X Defense Tech ETF, Yahoo! Finance, and YCharts. *Palantir went public in Sept. 2020. **Doesn't trade over-the-counter (OTC) in the U.S.; returns shown are for the stock trading on the Korea Stock Exchange. Data to April 4, 2025.
A word of caution about Hanwha Aerospace's eye-popping returns: This South Korean company does not trade over-the-counter (OTC) in the U.S., as the other stocks in the chart do. As a U.S. investor, had you invested in this stock, you would not have realized the gains shown. That's because of changes in the currency-exchange rate between the U.S. dollar and South Korean won over the investment periods.
Palantir and Rheinmetall: The dynamic duo driving this ETF's performance over the last year
Over the last year, the two biggest drivers of Global X Defense Tech ETF's robust performance were the U.S.'s Palantir and Germany's Rheinmetall. (Hanwha is excluded for the reason noted above.)
Palantir's business was summarized previously. In the fourth quarter of 2024, the company's revenue jumped 36% year over year to $828 million, with its segment split being 55% government and 45% commercial. Its adjusted earnings per share (EPS) soared 75% to $0.14. Both results easily beat Wall Street's estimates, as did the company's 2025 revenue guidance of growth of 36% year over year.
Rheinmetall is Germany's largest defense contractor and provides a wide array of defense products and services, as well as automotive components. It's probably best known for its armored vehicles (tanks) and its weapons division, which is one of the world's largest makers of ammunition.
In 2024, the company's revenue jumped 36% year over year to 9.75 billion euro, driven by a 50% surge in its defense business, which accounted for about 80% of total revenue. Operating income soared 61% to a record of 1.48 billion euro. Its backlog increased 44% to 55 billion euro, a record high. Moreover, the company has guided for continued strong results in 2025.
Two main ways to use the data in this article
Investors interested in global diversity can consider buying shares of Global X Défense Tech ETF. Those interested in buying individual shares of European defense stocks can further explore this ETF's European holdings.
