Looking beneath the defence stock sell off
Key points
Global defence has been one of the market’s standout themes in recent years, powered by a structural step-up in spending across NATO and its allies. Yet after a strong run, defence stocks have fallen over 2026, even as the spending story has grown stronger. Contractor order books have pushed past US$1 trillion for the first time1, and the conflicts in Ukraine and Iran continue to reinforce the case for sustained investment in defence.
Much of the recent softness has come from Europe, where valuations have reset after last year’s surge.
With that backdrop in mind, this piece looks at how the ARMR Global Defence ETF fared over the second quarter. As a reminder, ARMR holds global companies headquartered in NATO member and major NATO ally countries (such as Australia, Japan and South Korea) which derive more than 50% of their revenues from the development and manufacturing of military and defence equipment, as well as defence technology.
Q2 2026 in review
After a period of strong performance, ARMR pared gains in the second quarter, with the fund returning -9.6%2, bringing year to date returns to -5.9%3. Noting that ARMR’s 1 year, 3 years and 5 year index returns were 0.9%, 31.6% p.a. and 24.9% p.a., respectively4.
The quarter’s defining theme was a shift in the type of defence spend. Conflicts in Ukraine and now Iran are increasingly being fought with cheap, mass-produced drones rather than expensive fighter jets and large missile programs. That has investors reassessing the traditional primes, and rotating toward autonomy, AI and space.
The performance figures below are for the individual stocks from 31 March 2026 to 30 June 2026 used to review the quarter’s performance. Past performance is not an indicator of future performance.
Top performers:
- Safran (France): +23.9%5 – ARMR’s largest holding at the end of Q2, higher on a €50m German expansion and a €120m investment to lift production of advanced inertial navigation systems6.
- Rocket Lab (Space): +58.3%7 – buoyed by excitement around the SpaceX IPO and standout results, including 64% year-on-year revenue growth and a record US$2.2bn order backlog8.
European defence stocks led the drag after last year’s rally, on profit-taking and valuation reset:
- Rheinmetall (Germany): -31.3%9– pressured further after Germany scrapped a naval flagship program worth more than €12bn10 that had Rheinmetall as lead contractor.
- Northrop Grumman (US): -25%11 – sold off despite beating earnings, as investors questioned the outlook for its next-generation programs.
- Palantir (AI): -20.2%12 – caught in a broader de-rating of richly valued AI names (it peaked above 250x forward earnings13), though it remains a key beneficiary of US spending on AI and automation, reporting record revenue and raising guidance.
Despite the market pause, the spending backdrop only strengthened:
- NATO Summit (Ankara): members were pressed to deliver “clear, concrete and credible” plans toward the new 5% of GDP target, with the alliance already averaging roughly 4% just one year in. Over €50bn of new procurement was announced, alongside a “NATO Drone Edge” initiative to invest US$40bn in uncrewed systems over five years.14
- United States: Congress approved over US$1tn for 2026, and the FY27 budget proposes a record US$1.5tn (a ~40% increase15), including US$53.6bn for a “Drone Dominance” program.
The clear message from the quarter is that spending continues to ramp to record levels, but the target of that spend is shifting toward cheaper, nimbler, technology-led solutions. For long-term investors, the pullback has reset valuations in a sector with multi-year earnings visibility and growing relevance as a geopolitical hedge.
ARMR remains well placed to capture shifts in the defence landscape as a globally diversified defence exposure holding 60 leading companies which derive 50% or more of their revenues from the development and manufacturing of military and defence equipment, as well as defence technology.
Investor support has held firm, with ARMR growing to $223.5m in FUM as at 30 June 202616.
Investing in defence
ARMR Global Defence ETF is a simple way for Australian investors to gain exposure to the global defence sector.
ARMR currently holds 13 of the top 20 defence contractors in the world by defence revenue17, including US and European defence leaders like Lockheed Martin, Palantir Technologies, BAE Systems, as well as modern defence technology companies like Australia’s DroneShield and end to end space company Rocket Lab (the 7 companies in the top 20 not held are either not “pure-play” or not headquartered in NATO-aligned countries).
ARMR may be considered for use as a satellite or minor allocation in an investor’s portfolio.
There are risks associated with an investment in ARMR, including market risk, sector risk and concentration risk. Investment value can go up and down. An investment in the Fund should only be considered as a part of a broader portfolio, taking into account your particular circumstances, including your tolerance for risk. For more information on risks and other features of the Fund, please see the Product Disclosure Statement and Target Market Determination, both available on this website.
The information contained in this article is general information only and does not take into account any person’s financial objectives, situation or needs. Investors should consider the appropriateness of the information taking into account such factors and seek financial advice. This article is provided for information purposes only and is not a recommendation to make any investment or adopt any investment strategy.
This material may contain forward-looking statements. These statements reflect current expectations based on information available at the time of writing.
No assurance is given that any of the companies in the Fund’s portfolio will remain in the portfolio or will be profitable investments.
Past performance is not an indicator of future performance.
1. Source: PwC, Aerospace and Defense: US Deals 2026 Midyear Outlook, June 2026.
2. Source: Bloomberg. As at 30 June 2026. Returns from March 31 2026 to June 30 2026. Returns are after ARMR’s fund management fees and costs. ARMR’s index is the VettaFi Global Defence Leaders Index. Past performance is not an indicator of future performance. You cannot invest directly in index.
3. Source: Bloomberg. As at 30 June 2026. Returns are after ARMR’s fund management fees and costs. ARMR’s index is the VettaFi Global Defence Leaders Index. You cannot invest directly in index. Past performance is not indicative of future performance.
4. Source: Bloomberg. As at 30 June 2026. ARMR’s index is the VettaFi Global Defence Leaders Index. You cannot invest directly in index. Past performance is not indicative of future performance.
5. Source: Bloomberg. As at 30 June 2026.
6. Source: Safran, press releases, 8 and 9 June 2026 (Montluçon and Ludwigsburg investments).
7. Source: Bloomberg. As at 30 June 2026.
8. Source: Rocket Lab, First Quarter 2026 Financial Results, 7 May 2026.
9. Source: Bloomberg. As at 30 June 2026.
10. Source: Reuters, 24 June 2026 (Germany scraps F126 frigate programme).
11. Source: Bloomberg. As at 30 June 2026.
12. Source: Bloomberg. As at 30 June 2026.
13. Source: Bloomberg. As at 30 June 2026.
14. Source: NATO, 2026 NATO Summit, Ankara (NATO’s Drone Edge), July 2026.
15. Source: White House, Fiscal Year 2027 Budget Request (Department of War), April 2026.
16. Source: Betashares. As at 30 June 2026.
17. Source: Betashares, Bloomberg. As at 30 June 2026.