Germany, the Netherlands, Sweden, Denmark, Austria, and Finland have recently urged the European Union (EU) to cut hundreds of billions of euros from the proposed 2028-2034 budget and redirect that funding toward defense and innovation. The six countries, which together account for roughly 40% of the EU’s budget revenues, signed a letter demanding a “fundamental reform” of the bloc’s spending priorities. 

The European Commission had proposed a nearly $2.3 trillion budget, with approximately $149 billion earmarked for defense, security and space.

The signatories now want that figure to be larger — and they want it funded by slashing agriculture subsidies and regional development funds, which traditionally consume about two-thirds of the EU budget.

This development puts the spotlight on defense contractors and the exchange-traded funds (ETFs) holding them, which stand to benefit from such budget expansions. 

But before investors jump into these funds, it’s worth understanding the rationale behind this rearmament push — and why it might ultimately benefit defense ETFs.

The Security Rationale Behind the Rearmament Push Now

The EU’s own defense agency delivered an assessment in September: Europe is not rearming quickly or effectively enough to defend against Russia by 2030. Russia’s military budget, adjusted for purchasing power, now equals 85% of all EU member states’ defense spending combined, according to European Commission vice-president Andrius Kubilius.

The European Defence Agency’s first annual Defence Readiness Report, published recently, found that current plans “do not seem to meet” the goal of filling critical gaps in air and missile defense, artillery systems, ammunition stockpiles, drones and military mobility. 

But this gap assessment is only half the story. What is prompting EU allies to act now is the sheer accumulation of geopolitical shocks that have shattered the post-Cold War assumption that peace in Europe could be taken for granted.

Russia's full-scale invasion of Ukraine in 2022 was the first rupture. Instead of any respite, the war has only become a grinding attritional conflict over the past couple of years, with tensions having escalated more rapidly over the past month.

The second shock came from across the Atlantic, with U.S. President Donald Trump repeatedly threatening to withdraw from NATO, even as he recommitted to the mutual defense clause at a July summit. For EU nations, this has been a more awakening moment to make their own security rock solid with less dependence on America. 

Moreover, cross-border threats like Iran's nuclear ambitions and instability across the Middle East, along with cyberattacks on European infrastructure and hybrid warfare tactics, have played a crucial role in this rearmament push from the EU allies.

Why Defense ETFs Could Offer a Diversified Strategy

The budget reallocation is not merely a political statement. If approved, it would funnel hundreds of billions of euros into European defense procurement over the seven years from 2028 to 2034. That spending will flow to contractors like Rheinmetall (RNMBY Quick QuoteRNMBY - Free Report) , BAE Systems (BAESY Quick QuoteBAESY - Free Report) , Rolls-Royce (RYCEY Quick QuoteRYCEY - Free Report) , Safran (SAFRY Quick QuoteSAFRY - Free Report) and Leonardo — companies that already feature prominently in defense-focused ETFs. These firms are positioned to capture orders for artillery, air defense systems, munitions, drones, and military mobility infrastructure, precisely the capability gaps the EU report identified.

However, individual defense stocks carry concentration risk. A single contract loss, program delay, or political shift can hammer a standalone company. ETFs offer diversified exposure across the defense ecosystem — not just prime contractors but also cybersecurity firms, AI-driven defense technology companies, and “picks and shovels” suppliers that enable the broader rearmament effort.

Defense ETFs Positioned to Benefit

Considering the aforementioned discussion, the following defense ETFs are positioned to benefit from the rising security budget allocation across the EU:

Global X Defense Tech ETF (SHLD Quick QuoteSHLD - Free Report)  

This fund, with net assets worth $6.56 billion, offers exposure to 50 companies positioned to benefit from the increased adoption and utilization of defense technology. BAESY holds the sixth position in this fund, with 4.65% weightage, while RNMBY holds the eighth spot with 3.69% weightage.

Country-wise, Britain holds 6.3% of this fund’s assets, enjoying the second position, whereas Germany, France and Italy enjoy the fourth, fifth and sixth spots, respectively, together holding 13.5% of its assets. The fund charges 50 basis points (bps) in fees.

Themes Transatlantic Defense ETF (NATO Quick QuoteNATO - Free Report)   

This fund, with a net asset value (NAV) of $37.24, offers exposure to 90 aerospace and defense companies headquartered in North Atlantic Treaty Organization member countries. RYCEY holds the second position in this fund, with 8.24% weightage, while SAFRY holds the fifth spot with 6.63% weightage. 

France, the United Kingdom, Germany and Italy enjoy the second, third, fourth and fifth spots, respectively, and together hold 33.34% of its assets. BAESY holds the ninth spot in this fund, with 4.03% weightage. The fund charges 35 bps in fees.

Tema International Defense ETF (ARMY Quick QuoteARMY - Free Report)  

This fund, with assets under management worth $7.4 million, offers exposure to 35 innovators at the forefront of defense applications for AI, cybersecurity, robotics, and more — technologies reshaping modern security. RYCEY holds the sixth spot in this fund, with 3.52% weightage, while BAESY holds the ninth position with 3.47% weightage.

Country-wise, the United Kingdom accounts for 18.84% of the fund’s assets, ranking first, while France and Germany rank third and fourth, respectively, with a combined allocation of 25%. The fund charges 68 bps in fees.