Could defence stocks protect your portfolio from market disruption?

Defence stocks could live up to their name, with the sector providing a rare source of portfolio protection from the escalating conflict in the Middle East.

The Morningstar Global Aerospace and Defense Index, which is composed of global defence and aerospace stocks, fell 1.43% in the week to 6 March – a period of time that saw global stocks, as measured by the MSCI ACWI Index, fall by 3.7%. Global stocks are up 0.4% to date, while defence stocks have gained 11.7%.

Higher oil prices as a result of the conflict have created challenges for all markets, but defence stocks are seeing heightened investor interest in the new less predictable environment.

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“A lot has changed since the start of the year,” Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree, told MoneyWeek. “The pace of threats and attacks… has been unprecedented. Geopolitical risk is at an all-time high.

“We’ve definitely seen more momentum towards defence stocks as a whole,” Gupta added.

The opening months of 2026, from Trump’s intervention in Venezuela to his threats to acquire Greenland unilaterally and, now, the conflict with Iran, have all created an environment where the world looks set to spend more on defence.

That is particularly true of Europe. European defence stocks have been among the biggest winners so far this year; Germany’s Rheinmetall (DE:RHM) is up 2.0%, while Italy’s Leonardo (MI:LDO) is up 5%.

The main drivers for defence stocks

“I see Europe as the region with the biggest [defence] under-investment gap,” said Gupta. While the US is also upping its defence spending, it is doing so from a larger base and there is therefore a less significant acceleration.

“Europe is building from a much lower base” given decades of underinvestment, said Gupta. “Even within Asia, we’re seeing critical geopolitical flashpoints such as tensions rising between China and Japan… we have seen military budgets within Korea, China and Japan also expand.”

The uplift for defence stocks is not a new phenomenon: the sector has been buoyant since Trump’s return to the White House at the start of last year. The president’s insistence that other NATO member states were going to have to up their defence spending triggered a widespread reaction; Germany, for example, looks set to increase its annual defence budget by more than €60 billion by 2029.

That created a tailwind for defence stocks last year. It has seen earnings rise: Rolls Royce (LON:RR.) announced full-year results on 26 February (prior to the Iran conflict starting) which showed a 14% increase in revenue and a 38% increase in underlying operating profit.

This performance was supported by “sustained demand across transport, combat and submarine programmes”, said Loredana Muharremi, equity analyst at Morningstar.

Should you invest in defence stocks?

Defence is now a highly in-demand sector, and that means that its leading names are more expensive than ever. Data from Macrotrends shows that Lockheed Martin’s (NYSE:LMT) price/earnings ratio has risen from around 14 in September 2023 to over 30 at the start of March 2026.

The reason for this valuation increase is that many believe the tailwinds currently benefitting the sector are structural. Even if the US-Iran conflict, and the war in Ukraine, are resolved swiftly, the world is on alert that the ‘rules-based order’ that kept the world relatively peaceful for decades can no longer be relied upon.

Defence budget increases are, in all likelihood, here to stay.

That could change: Marcel Stötzel, portfolio manager at Fidelity European Trust, can see a world in which a recession necessitates European economies to spend more on social welfare over the coming years, which could leave less funding available to increase defence spend.

“If we get a recession, and the social spending requirements come up… especially if the Ukraine war has [already] ended, then defence spend is going to be an easy target,” he said.

But besides this hypothetical scenario, most experts agree that higher spending on defence, especially in Europe, is a long-term shift.

How to invest in defence stocks

Defence and aerospace companies like Lockheed Martin, Rolls Royce and Rheinmetall are obvious routes into the sector for investors that like to pick the top stocks themselves.

If you prefer to invest in funds then you could consider a thematic fund or exchange-traded fund (ETF) that targets the sector. Some options include:

• VanEck Defense UCITS ETF (LON:DFNG) (offering broad exposure to global defence and cybersecurity stocks)
• WisdomTree Europe Defence UCITS ETF (LON:WDEP) (specifically holds European defence stocks)
• Global X Defence Tech UCITS ETF (LON:ARMG) (invests in companies positioned to benefit from defence technology companies)
• HANetf Future of Defence Indo-Pac ex-China UCITS ETF (LON:ADEF) which offers exposure to increased defence spending trends in Indo-Pacific nations, excluding China.