In the ever-evolving landscape of global security, 2025 has emerged as a pivotal year for defense investment funds. Amid escalating geopolitical tensions and a renewed emphasis on national security, nations and private entities are channeling unprecedented resources into defense sectors. This surge is not merely a reaction to immediate threats but a strategic move to fortify long-term stability and technological superiority.
Global Surge in Defense Budgets
The year 2025 has opened with a marked rise in global defense spending as nations accelerate efforts to modernize their military forces. In Europe, Greece unveiled a €25 billion initiative called “Achilles Shield,” designed to enhance national defense capabilities through investments in AI-powered missile systems, surveillance drones, and cyber defense infrastructure. As reported by AP News, the plan spans the next decade and represents the country’s largest rearmament since joining NATO, reflecting heightened regional security concerns in the Eastern Mediterranean.
Elsewhere in Europe, Sweden has committed to raising its defense budget to 3.5% of GDP by 2030, with substantial increases already scheduled in 2025. This dramatic shift was confirmed following the country’s accession to NATO. According to Reuters, this marks Sweden’s largest military expansion since the Cold War, aiming to build up advanced land, air, and naval capabilities as well as joint interoperability with allied forces.
In the Asia-Pacific, Taiwan has allocated a record $19.1 billion to defense spending in 2025, an 8.5% increase from the previous year. The budget emphasizes asymmetric warfare development, cyber security, and long-range precision strike systems. As reported by Bloomberg, the move is part of a long-term strategy to strengthen deterrence in the face of growing regional instability and strategic ambiguity in the Taiwan Strait.
This surge in defense budgets underscores a broader global trend: nations are shifting from traditional arms procurement to investing in next-generation technologies. Artificial intelligence, space surveillance, and autonomous systems are now at the forefront of modern defense strategy. As noted by Defense News, the increased expenditures reflect not just immediate geopolitical pressures, but also a recalibration of long-term military doctrines in the era of multi-domain warfare.
Private Equity’s Foray into Defense
In early 2025, private equity firms significantly increased their investments in the defense sector, reflecting a strategic shift driven by escalating geopolitical tensions and the growing demand for advanced military technologies. According to S&P Global Market Intelligence, this surge underscores the sector’s resilience and potential for robust returns, even amidst broader economic fluctuations.
European defense companies have become particularly attractive to investors, as nations across the continent bolster their military capabilities in response to regional conflicts and security concerns. The rise of European defense exchange-traded funds (ETFs) highlights this trend, with significant inflows observed in March 2025. Notably, the Select STOXX Europe Aerospace & Defense ETF (EUAD) experienced a 20.6% performance increase during that month, driven by heightened defense spending and investor confidence in the sector’s growth potential. This development is detailed in an analysis by S&P Global Market Intelligence.
In the United States, private equity firms are poised to capitalize on their defense investments amid increased military spending driven by global tensions and political support. Despite uncertainties stemming from proposed policies on import tariffs and federal spending cuts, dealmakers remain optimistic about exit opportunities as the political landscape stabilizes. Since 2020, firms have backed 317 deals in the defense sector, encompassing technological advancements such as drones and electronic warfare systems. The sector anticipates continued momentum, bolstered by an accommodating regulatory environment and moderate military spending increases under the current administration, as reported by The Wall Street Journal.
Additionally, private equity firms are actively seeking opportunities in defense companies specializing in cutting-edge technologies like artificial intelligence and space systems. This strategic focus aligns with the defense industry’s emphasis on innovation to address modern security challenges. The Financial Times highlights this trend, noting that defense companies are preparing for increased deal activities to invest in advanced technologies, accelerated by ongoing global conflicts, including the war in Ukraine. By 2026, the leading 15 defense contractors are projected to have about $50 billion in free cash flow, nearly double that from 2021, positioning them favorably for strategic acquisitions and partnerships, as detailed in The Financial Times.
European Union’s Strategic Initiatives
The European Union has not remained on the sidelines. In a bold move, the EU unveiled “Readiness 2030,” a strategic defense initiative aimed at mobilizing up to €800 billion to bolster Europe’s defense infrastructure. This plan seeks to enhance the continent’s self-reliance in defense, particularly in light of uncertainties surrounding traditional alliances. As detailed in Wikipedia, the initiative encompasses measures such as fiscal flexibility, defense loans, and the creation of mechanisms to mobilize private capital for defense purposes.
Technological Advancements Driving Investments
Technological innovation continues to serve as the backbone of modern defense investment strategies in 2025. Governments around the world are prioritizing research and development in areas such as artificial intelligence, autonomous systems, hypersonics, and advanced air mobility to strengthen national security and maintain global competitiveness. According to Deloitte Insights, the U.S. Department of Defense has allocated $163.4 million toward hypersonic research and development, targeting improvements in thermal protection systems and the production capacity of solid rocket motors.
As threats evolve in complexity and reach, propulsion technologies—especially for hypersonic and space-based systems—have become central to maintaining a technological edge. Over the past decade, budget requests for missile and munitions-related procurement and development have surged 340%, reaching $30.6 billion in fiscal year 2024. This substantial increase highlights a strategic focus on strengthening long-range strike capabilities and addressing supply chain fragility for critical components. As outlined in the same Deloitte report, these initiatives reflect long-term efforts to modernize force posture through innovation-led investments.
Investment in unmanned aerial systems (UAS) has also grown markedly, with the U.S. Department of Defense allocating a significant share of its $61.2 billion air power budget in 2025 to platforms like the MQ-4 Triton and MQ-25 Stingray. These systems are designed to deliver high-endurance intelligence, surveillance, and refueling capabilities, enabling strategic flexibility across multiple combat theaters. Deloitte emphasizes that UAS will remain a key pillar in both manned-unmanned teaming and fully autonomous warfare models, setting the stage for sustained development across air, sea, and space domains.
This surge in technological investment is not limited to government programs. It has also attracted attention from institutional investors and private equity firms seeking exposure to dual-use technologies with strong commercial crossover. As defense ecosystems increasingly intersect with sectors like AI, quantum computing, and cybersecurity, the alignment of public and private capital is shaping a new era of digitally enabled defense innovation. These trends illustrate how technological advancement is not only transforming battlefield capabilities but also redefining global capital flows in the security sector, as captured in Deloitte’s 2025 Aerospace and Defense Industry Outlook.
Emergence of Defense-Focused Investment Vehicles
In response to the burgeoning interest in the defense sector, specialized investment vehicles have gained prominence. Defense-focused Exchange-Traded Funds (ETFs) offer investors diversified exposure to companies within the aerospace and defense industries. Notably, the iShares U.S. Aerospace & Defense ETF (ITA) has demonstrated resilience, reflecting the sector’s robust performance. As reported by U.S. News, such ETFs provide a strategic avenue for investors aiming to capitalize on the defense industry’s growth trajectory.
The ITA tracks the performance of the aerospace and defense sector of the U.S. equity market, encompassing companies involved in the manufacture, assembly, and distribution of aerospace and defense equipment. According to Yahoo Finance, as of March 31, 2025, the ETF reported a year-to-date return of 5.51%, underscoring its stability amid market fluctuations.
Beyond ITA, other ETFs have also garnered attention. The Invesco Aerospace & Defense ETF (PPA) offers exposure to U.S. companies engaged in the defense sector. As highlighted by U.S. News, PPA provides investors with an alternative means to access the defense industry’s potential, further emphasizing the growing appeal of defense-focused investment vehicles in 2025.
Challenges and Ethical Considerations
Investing in the defense sector presents a complex landscape of financial opportunities intertwined with ethical considerations. The discourse surrounding “ethical investment” has intensified, prompting investors to balance profitability with social responsibility. In the United Kingdom, the government has actively engaged with venture capital firms to promote defense investments as contributions to continental security. Defense Minister John Healey emphasized that such investments are not only strategic but also ethical, highlighting the role of private capital in bolstering national defense capabilities. As reported by Reuters, this initiative seeks to unlock billions of pounds of private investment into British technology and defense companies.
Institutional investors are also reevaluating their positions on defense-related assets. Allianz Global Investors, managing approximately €570 billion in assets, has revised its sustainable investment funds policy by removing exclusions on companies generating significant revenue from military equipment and services. This policy shift aligns with Europe’s broader trend of increasing military expenditure and reflects the acknowledgment that previous restrictions may have been overly stringent. According to Reuters, this move supports Europe’s intensified rearmament efforts.
Similarly, UBS Asset Management has adjusted its sustainability funds criteria, removing certain exclusions on investments in defense companies. Managing $1.8 trillion in assets, UBS joins other European money managers in enabling funds to finance Europe’s rearmament efforts in response to escalating geopolitical tensions. While easing these restrictions, UBS maintains exclusions for controversial weapons such as cluster munitions and biological weapons. As detailed by Reuters, this policy adjustment reflects a nuanced approach to balancing ethical considerations with investment strategies.
These developments underscore a broader shift in the investment community, where ethical considerations are being recalibrated in the context of national security imperatives. Investors are increasingly required to navigate the delicate balance between supporting defense initiatives deemed vital for security and adhering to principles of social responsibility. This evolving landscape highlights the complexity of ethical investment decisions in sectors critical to national and global stability.
Future Outlook
Looking ahead, the trajectory of defense investments appears poised for sustained growth. The confluence of geopolitical dynamics, technological advancements, and strategic imperatives suggests that defense sectors will remain focal points for both public and private capital. The European Union’s strategic defense initiative, “Readiness 2030,” aims to mobilize up to €800 billion to enhance military capabilities, reflecting a collective commitment to fortifying defense infrastructure. As detailed by Wikipedia, this plan seeks to address emerging security challenges and reduce reliance on external allies.
Private equity firms are also increasing their exposure to the defense sector, recognizing its resilience and potential for robust returns. In 2024, investments in defense and security totaled $2.6 billion through September, surpassing the $2.2 billion invested across the entire previous year. According to Moonfare, this trend underscores the growing confidence of private capital in the defense industry’s growth prospects.
Technological innovation remains a driving force behind defense investments. The U.S. Department of Defense’s fiscal 2025 budget request includes $163.4 million allocated to hypersonic research and development efforts, emphasizing the focus on advanced technologies such as solid rocket motors. As reported by Deloitte Insights, these investments aim to address critical technological needs and maintain a competitive edge in modern warfare.
In conclusion, 2025 stands as a landmark year for defense investment funds. The synergistic efforts of nations and private entities underscore a collective commitment to fortifying defense capabilities. As the global community grapples with complex security challenges, these investments not only promise financial returns but also contribute to the broader objective of ensuring stability and peace in an unpredictable world.
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