How to Invest in Defense Stocks 2026: EU Investor Guide

Quick Answer

Defense stocks have been one of the strongest sector trades of 2022-2026, driven by Russia's war in Ukraine, sustained NATO 2% GDP target compliance and renewed great-power competition. EU investors can build exposure across US primes (Lockheed Martin, Raytheon, Northrop Grumman, General Dynamics, L3Harris) and EU champions (Rheinmetall, BAE Systems, Thales, Leonardo, Saab, Kongsberg). Rheinmetall is the standout EU performer, up roughly 10x since early 2022. EU defense spending crossed €400 billion total in 2025 and continues climbing. UCITS ETFs available include WisdomTree Europe Defence (WDEF) and HANetf Future of Defence (NATP/ARMY); the US-listed ITA and PPA are blocked under MiFID II.

---

Top Defense Stocks and ETFs at a Glance

Numbers are May 2026 estimates rounded for context. Verify before investing.

---

Methodology

Universe last revised on 2026-05-07. Selection captures defense primes with disclosed defense revenue greater than $5 billion and EU champions including all major NATO-aligned EU and Nordic defense companies. NATO spending data sourced from the NATO Defence Expenditure Report 2025. Stock universe filtered for liquidity sufficient for retail order execution on European brokers. ETF universe limited to UCITS-eligible products listed on Xetra, LSE, Borsa Italiana and Euronext. Some asset managers exclude defense names from ESG portfolios but most EU member states have re-classified defense as compatible with sustainability frameworks since 2022.

---

Sector Thesis: Why Defense Now

Bull Case

Multi-year structural rerating. NATO members committed to 2% of GDP defense spending in 2014 and the war in Ukraine accelerated compliance. Total NATO defense spending exceeded $1.4 trillion in 2025, with European NATO contribution above €400 billion for the first time. Germany's €100 billion Sondervermögen special fund and the resulting permanent uplift to the German base defense budget (now above 2.5% of GDP) are an order-of-magnitude shift in European spending.

Backlog gives multi-year revenue visibility. Order backlogs across the major primes are at all-time highs. Lockheed Martin reported a $176B backlog in late 2025, RTX above $220B, Rheinmetall above €55B and BAE Systems above £75B. These backlogs translate to 3-4 years of revenue visibility, an unusually long planning horizon for an industrial sector.

Munitions replenishment is a multi-decade tailwind. Western 155mm artillery shell production has tripled from pre-Ukraine levels and remains insufficient. NLAW, Javelin, Stinger, GMLRS and Patriot interceptor production capacity is being doubled across multiple sites. The munitions supercycle is a real industrial buildout, not a one-time spend.

ESG re-rating. Several major EU asset managers re-classified defense as compatible with sustainability frameworks in 2022-2024, freeing institutional capital that had been excluded.

Bear Case

Cyclicality of the trade. Defense spending follows political cycles. A US administration shift in 2028 or a Ukraine ceasefire could rerate the sector lower. Past peace dividends (1990s, post-Iraq drawdowns) compressed defense multiples by 30-40%.

Programmatic execution risk. Lockheed F-35 has had recurring engine, software and TR-3 delivery delays. Boeing Defense persistent loss-making programs. Cost overruns can compress margins on long-term fixed-price contracts.

Already significantly priced in. Rheinmetall up roughly 10x since early 2022 and trading at over 30x forward earnings carries a steep valuation premium. A peace dividend scenario would compress this fastest.

ESG flows can reverse. A change in EU regulatory taxonomy could push defense back outside ESG-eligible portfolios.

Drivers to Watch

• NATO summit communiques (annual)
• US defense authorisation acts (NDAA)
• Bundestag and other parliamentary defense budget approvals
• Munitions production capacity announcements (Lockheed, Rheinmetall)
• Major program awards (F-35, B-21, Eurofighter follow-ons, FCAS)

---

Sub-Sector Breakdown

US Primes

Lockheed Martin (LMT). F-35 program prime ($176B backlog), missile systems (PAC-3, Javelin, GMLRS), space systems and aeronautics. Mid to high single-digit revenue growth, margin expansion as production scales. Forward P/E around 18-22x in May 2026, attractive against EU defense valuations.

RTX Corporation (RTX). Combines Raytheon (Patriot, Tomahawk, AMRAAM), Pratt & Whitney (GTF engine, F-35 propulsion) and Collins Aerospace (avionics, communications). The most diversified prime with backlog above $220B. Pratt GTF powder metal issue largely worked through.

Northrop Grumman (NOC). B-21 Raider stealth bomber, Sentinel ICBM, Triton, Global Hawk. Highest weighting to long-term strategic programs; lowest near-term cyclicality.

General Dynamics (GD). Abrams tanks, Stryker, Virginia and Columbia submarines, Gulfstream business jets. The land systems and naval prime.

L3Harris Technologies (LHX). Communications, electronic warfare, Aerojet Rocketdyne propulsion (acquired 2023). Growth from solid rocket motor capacity expansion.

Boeing (BA). Defense business is roughly 40% of revenue. Persistent losses on KC-46, Air Force One and T-7A programs offset strength elsewhere. Commercial recovery dominates the equity story.

EU Champions

Rheinmetall (RHM.DE). The standout. Stock rose from below €100 in February 2022 to above €700 in 2025 on the back of artillery ammunition orders, Leopard tank production, Lynx IFV and air defense systems. Backlog exceeded €55B in late 2025. Listed Xetra, EUR-denominated, the cleanest single-name EU defense exposure.

BAE Systems (BA.L). UK defense champion. Eurofighter, Astute and Dreadnought submarines, electronic systems, US subsidiary supplies the M88 howitzer and Bradley IFV upgrades. £75B backlog. GBP-denominated.

Thales (HO.PA). French electronics, radar, sensors, military communications and growing defense AI. Listed Euronext Paris, EUR-denominated. The cleanest exposure to defense electronics and digital battlefield themes.

Leonardo (LDO.MI). Italian helicopters, defense electronics (DRS subsidiary in US), aerostructures. Listed Borsa Italiana, EUR-denominated.

Saab AB (SAAB-B.ST). Swedish Gripen fighter, NLAW anti-tank weapons (used extensively in Ukraine), Carl-Gustaf, GlobalEye AEW&C. Listed Stockholm, SEK-denominated.

Kongsberg Gruppen (KOG.OL). Norwegian Naval Strike Missile (NSM), Joint Strike Missile, defense systems. Listed Oslo, NOK-denominated.

Dassault Aviation (HEN.PA / AM.PA). Rafale fighter and Falcon business jets. Significant Rafale export momentum (India, UAE, Indonesia, Greece, Egypt). Family-controlled, low free float.

Specialty and Mid-Caps

Hensoldt (HAG.DE). German sensor and radar specialist (TRML-4D, PrecISR). Listed Xetra. Higher beta to EU defense theme.

MTU Aero Engines (MTU.DE). Eurofighter and military engine MRO plus civil aero exposure.

Renk Group (RENK.DE). Tank transmissions and gear systems. IPO'd in 2024.

---

EU-Accessible UCITS ETFs

US-listed ITA, PPA, XAR are not available to EU retail under MiFID II. The three UCITS ETFs above (WDEF, NATP, DFNS) are the practical implementations. WDEF is the cleanest pure-EU sector exposure; NATP and DFNS include US primes for diversified global exposure.

---

Risks for Defense Investors

• Political risk. Spending follows electoral cycles. A meaningful peace dividend could rerate the sector lower.
• Programmatic execution risk. Cost overruns on fixed-price contracts can compress margins.
• Concentration in primes. Single-program risk (F-35 for LMT, B-21 for NOC) means program issues matter materially.
• Already-priced expectations. Rheinmetall at 30x+ forward earnings carries a steep premium.
• ESG mandate risk. Asset manager taxonomy changes could constrain demand.
• Currency. USD, GBP, SEK, NOK exposure adds EUR translation risk.

---

Worked Allocation: 5% Defense Tilt in a €100,000 Portfolio

A 5% sector tilt equals €5,000. One sensible split with EU bias:

• €1,500 in WDEF UCITS ETF for diversified EU core
• €1,250 in Rheinmetall (EU defense bellwether)
• €1,000 in Lockheed Martin (US prime, more attractive valuation)
• €750 in BAE Systems (GBP diversifier)
• €500 in Thales (defense electronics tilt)

Roughly 70% EU-domiciled defense exposure, 30% US, with the largest single name (Rheinmetall) at 1.25% of total portfolio. Re-balance annually given the volatility of the sector.

---

Tax Handling for EU Investors

US-listed names (LMT, RTX, NOC, GD, LHX, BA) require W-8BEN for the 15% US dividend treaty rate.

Rheinmetall pays a German dividend with 26.375% withholding (Kapitalertragsteuer plus solidarity). The treaty refundable rate depends on residence: Polish residents claim the difference between 15% and 26.375%; the refund process via the BZSt is administratively heavy. Holding RHM inside an Irish-domiciled UCITS ETF mitigates the second layer.

BAE Systems (UK) carries 0% UK withholding on dividends as a matter of domestic law for non-resident retail.

Thales and Dassault (France) carry 25-28% French withholding which is reducible to 12.8% via treaty reclaim through the dividend agent.

Leonardo (Italy) pays a 26% Italian withholding refundable to 15% via treaty.

Saab (Sweden) carries 30% withholding refundable to 15% via the SKV 3742 form.

For Polish residents the 19% Belka tax applies on capital gains and dividends after the foreign withholding credit. UCITS accumulating ETFs (WDEF, NATP, DFNS) handle internal withholding more efficiently than direct retail holdings across multiple jurisdictions. Always verify with a local tax adviser.

---

Authoritative Sources

• NATO Defence Expenditure of NATO Countries 2014-2025 (nato.int)
• Lockheed Martin 2025 10-K (lockheedmartin.com/investors)
• Rheinmetall annual report 2025 (rheinmetall.com)
• BAE Systems 2025 results (baesystems.com/investors)
• WisdomTree Europe Defence UCITS factsheet (wisdomtree.eu)
• Stockholm International Peace Research Institute (SIPRI) Military Expenditure Database 2025
• European Defence Agency Defence Data 2024-2025 reports
• US Department of Defense FY2026 budget request (comptroller.defense.gov)

---

FAQ

Is Rheinmetall still a buy after the run? Forward P/E above 30x and orderbook visibility through 2028 mean fundamentals support continued growth, though the valuation buffer is thin. Position sizing matters more than entry timing.

Can EU investors buy ITA or PPA? No, both US-listed and blocked under MiFID II. Use WDEF, NATP or DFNS UCITS substitutes.

Which is the best single EU defense pick? Rheinmetall is the clearest beneficiary of artillery and land systems demand. BAE for naval and submarines. Thales for defense electronics. Saab for missiles.

Are defense stocks ESG-compliant? Most major EU asset managers re-classified defense as ESG-compatible during 2022-2024 with the exception of cluster munitions and landmines.

Is the Trump effect priced in? US defense names rallied on tariff and spending expectations through early 2026. EU defense rallied harder on the bet that European countries would fund their own defense more independently.

What's the cycle exit signal? A negotiated Ukraine settlement plus declining NATO commitment data would be the early signal. Backlogs would still take 2-3 years to roll off.

Should I avoid US primes for ethical reasons? Personal preference. EU pure exposure is achievable through WDEF or direct EU stocks (RHM, BA.L, HO.PA, LDO.MI, SAAB-B).

---

TL;DR

• US primes (LMT, RTX, NOC, GD, LHX) and EU champions (Rheinmetall, BAE, Thales, Leonardo, Saab, Kongsberg) span the universe.
• Rheinmetall up roughly 10x since early 2022 on Ukraine and German Sondervermögen.
• Total NATO defense spending crossed $1.4T in 2025, European NATO above €400B.
• UCITS ETFs for EU investors: WDEF 0.40%, NATP 0.49%, DFNS 0.55%. ITA and PPA blocked under MiFID II.
• Order backlogs at LMT $176B, RTX $220B, RHM €55B+, BAE £75B+ provide multi-year revenue visibility.
• A 5% sector tilt (€5,000 in a €100k portfolio) split across WDEF, RHM, LMT, BAE and Thales is defensible.
• This guide is informational only and is not investment advice.