How defence companies earn money
Governments order equipment years in advance and pay over the life of the programme. A fighter aircraft or submarine programme can run for decades, including maintenance and upgrades. That gives large contractors a long, visible order book.
The same feature limits profits. Governments negotiate hard, audit costs and can cancel or delay programmes. Margins are steady rather than high.
Budgets follow politics
Defence spending rises when governments feel threatened and falls when they do not, or when money is needed elsewhere. Budget decisions made in a few capitals drive demand for the whole industry.
Share prices often move on announcements and expectations well before any money is spent, and can fall back if plans are delayed.
Your own values
Some people will not invest in weapons manufacturers at all. Others distinguish between types of equipment. Many ethical and sustainable funds exclude the sector, while some have changed their approach in recent years.
There is no right answer for everyone. If you build your own portfolio you can set the boundary yourself, for example by excluding particular companies.
Currency and country mix
A portfolio spanning US and European contractors holds shares priced in several currencies. Exchange rate movements will affect your returns alongside the companies' results.
Companies that sell mostly to their home government depend on that country's budget. Those that export more depend on export licences and on the politics of their customers.
Who's who in defence
US prime contractors
The largest suppliers to the US government across aircraft, ships and missiles.
For example: Lockheed Martin, RTX, Northrop Grumman, General Dynamics
European contractors
The main suppliers to European governments.
For example: BAE Systems, Rheinmetall, Leonardo, Thales, Saab
Electronics and sensors
Radar, communications and guidance systems used across platforms.
For example: L3Harris, Hensoldt
Mixed aerospace
Companies that earn from both military and civilian aircraft.
For example: Airbus, Safran, Rolls-Royce
Companies are listed to show what each category means. They are not recommendations, and the list is not complete.
Three ways to invest
There is no single right route. Many people combine them, and plenty decide a broad global fund is all they need.
- 1
Buy individual shares
Pick one or more defence companies and buy their shares through a broker or investing app.
- Good for
- Simple to understand. You own exactly what you chose.
- Watch out for
- If you only hold a few companies, one bad result can do real damage. Picking winners is hard, even for professionals.
- 2
Buy a ready-made fund
A fund (often an ETF) holds dozens of companies in one purchase. Examples include the iShares U.S. Aerospace & Defense ETF (ITA) in the US and the VanEck Defense UCITS ETF (DFNS) in the UK and Europe.
- Good for
- Instant spread across many companies, with very little effort.
- Watch out for
- You get what the fund provider chose, including companies you may not want. Themed funds usually charge more than broad trackers, so check the yearly fee and the top ten holdings. Which funds you can buy depends on where you live.
- 3
Build your own portfolio
Choose your own mix of companies and how much of each, then buy them through your broker. This is what Arithmos helps with: describe the mix in a sentence and it builds and tests one for you to consider.
- Good for
- You decide exactly what is in and what is out, and you can see the reason for every company.
- Watch out for
- More to look after than a fund. Buying many separate shares can cost more in dealing fees, and a tested result is a simulation, not a promise.
The risks
- Political risk. Budgets, export rules and programme decisions can change with governments.
- Programme risk. Large projects run late and over budget, and can be cancelled.
- Expectations. Prices can rise sharply on spending announcements and fall if the money arrives slowly.
- Concentration. A few large contractors make up most defence funds.
- Ethical and reputational considerations. Some investors, funds and pension schemes exclude the sector.
Try it yourself
The quickest way to understand a portfolio is to look at one. Here is how to turn this guide into something you can inspect.
- 1
Start from the idea
The button below opens the builder with this guide's idea already typed in. Change any part of it: the number of companies, the countries, the limit per company.
- 2
Read the reason for every company
You get a list of companies, how much of each, and a plain-English reason for each pick. If one looks wrong to you, you can ask for it to be changed.
- 3
Look at the bad years, not just the good ones
The portfolio is replayed against real past prices. Check the biggest fall along the way, and ask yourself whether you could have sat through it.
- 4
Decide for yourself
If you want to act on it, you buy the shares yourself through your own broker. Arithmos never holds your money or places trades.
“The biggest defence companies in the US and Europe. 15 companies, bigger companies get a bigger share, no company over 12%.”
Browsing portfolios other people have published is free. See pricing for what building your own includes. A tested result is a simulation using past prices. It is not a forecast and not a recommendation.
Common questions
Do defence stocks always rise when there is a conflict?
No. Prices often move in advance on expectations, and can fall later if spending is slower than hoped. Long-term results depend on actual government budgets and how well companies deliver.
Can I invest in defence in a UK ISA?
Shares and funds listed on recognised stock exchanges can generally be held in a Stocks and Shares ISA. Check with your provider which specific investments it offers.
Is investing in defence ethical?
That is a personal judgement. This guide sets out how the industry works so you can decide in line with your own values.
