Defence and Aerospace: How to Invest, Which Companies and Which ETFs

February 2022. Rheinmetall trades at around 100 euros per share. Then comes the Russian invasion of Ukraine, and within two years the stock exceeds 500 euros. A fivefold return in 24 months. Those who bet on European defence right before the conflict got rich. Those who came late to the hype train paid top valuations. That is what a sector bet looks like — well-timed it is excellent, poorly timed it hurts. Let's look at what this sector offers today and what it conceals.

Sector structure: who are the main players

The defence and aerospace sector is broader than it first appears. It includes manufacturers of military technology, civil aviation, component suppliers, companies providing cyber security for government customers and providers of satellite communications for the military.

• Lockheed Martin (LMT) — the world's largest defence contractor. F-35, hypersonic weapons, space programmes, missile defence systems. Stable dividends, predictable order book exceeding 150 billion dollars (verify the current figure in the annual report).
• RTX Corporation (RTX) — formed by the merger of Raytheon Technologies with United Technologies. The Raytheon division provides Patriot air-defence systems, guided missiles and sensors. The Pratt & Whitney division manufactures engines for both civil and military aircraft. The hybrid business model provides some stability through the civil component.
• BAE Systems (BA. on LSE) — a British contractor with exposure to NATO, Australia and Saudi Arabia. Shipbuilding, armoured vehicles, electronic warfare systems. Benefits from the British-American AUKUS partnership and growing NATO budgets.
• Rheinmetall (RHM) — a German pure-play in ammunition, combat vehicles and active protection systems. Rapidly growing order book driven by European rearmament. Valuations reflect a positive scenario — entering today means paying for the story, not for historical results.
• Airbus (AIR) — civil aviation dominates, defence programmes are secondary. More dependent on the global aviation market, tourism and supply chains than on defence budgets.

ETF ITA vs. DFEN: watch out for the fundamental difference

ITA — iShares U.S. Aerospace & Defense ETF. A passive fund tracking the US defence and aerospace industry. Dominated by Lockheed Martin, RTX, Northrop Grumman and Boeing. Verify TER on justETF. For Czech investors it is necessary to look for UCITS equivalents — availability depends on the broker.

DFEN — Direxion Daily Aerospace & Defense Bull 3x. Stop. This is a triple-leveraged ETF designed exclusively for day trading. It is never suitable for long-term holding. Structural losses caused by daily rebalancing — mathematically known as variance drag or beta decay — mean that even if the long-term market direction is correct, a long-term investor will lose money. DFEN is a tool for intraday traders who know exactly what they are doing. If someone recommends DFEN as part of a long-term portfolio, run.

Cyclicality, geopolitics and political risks

The defence sector behaves differently from classic cyclical industries like automotive or consumer electronics. Contracts are governmental, multi-year and usually with fixed agreed prices — this gives relative cash flow stability even in a recession. But spending depends on political will, and that changes.

Europe after 2022 significantly increased defence budgets. Germany activated a special 100-billion defence fund, Poland raised military spending above 4% of GDP, Scandinavian countries joined NATO. That is a structural tailwind for Rheinmetall, Leonardo or KNDS. But the political climate changes quickly. A peace initiative, coalition instability or fiscal consolidation can reduce the order book just as fast as it grew.

The ethical question you cannot avoid

Let me be open: the defence industry is a sector where an investor must clarify their values before buying the first share. Companies like Lockheed or Rheinmetall manufacture weapons. These protect democratic states — but also end up in the hands of actors whose actions are at least debatable.

ESG funds exclude or underweight defence companies. Other investors argue that supporting the defence of democratic countries is ethically defensible or even socially beneficial. Both positions are consistent and reasonable — it depends on your value framework. What is not consistent is ignoring this question entirely and then being surprised that you own weapons manufacturers.

For context: this is not investment advice. The sector goes beyond the foundation of any portfolio. The foundation is a diversified index. Defence as a satellite makes sense for an investor who believes in structural growth of spending, accepts the ethical and cyclical risk, and has clarity on their value framework.