Defence stocks are outpacing the ASX 200 this year as governments around the world pour billions into security, drones, and advanced weapons technology.
In the past 12 months, DroneShield Ltd (ASX: DRO) shares have surged almost 400%, Electro Optic Systems Holdings Ltd (ASX: EOS) has climbed more than 300%, and the VanEck Global Defence ETF (ASX: DFND) is up around 80%.
While the ASX 200 remains dominated by banks, miners, and healthcare giants, it’s the defence sector that’s been stealing the show lately — both at home and abroad.
We don’t celebrate the reasons behind it, but it’s impossible to ignore the structural forces at play. Rising global tensions, rapid innovation in drone and satellite technology, and governments rearming after decades of underinvestment have all combined to create powerful tailwinds.
Unlike the short-lived booms we sometimes see in tech or commodities, defence spending tends to run on multi-year cycles. Once budgets are approved, they rarely get cut. That makes this one of the few sectors where growth is both policy-driven and persistent, a rare mix in today’s short-term headline world.
The spending surge driving the boom
Defence budgets are among the few areas of government spending that rarely face cuts. Even when funding pauses, history shows the next cycle usually brings a bigger rebound. That’s because national security isn’t optional — it’s one of the few policy areas that tends to attract bipartisan agreement and consistent long-term investment.
Globally, that consistency is being amplified. NATO members recently committed to lift collective defence spending to 5% of GDP by 2035, up from the 2% target that’s been in place since 2014. Australia has pledged an additional $50.3 billion for the Defence Force, while in Japan, incoming Prime Minister Sanae Takaichi has fast-tracked the country’s plan to reach 2% of GDP in defence spending by 2026 — two years earlier than previously scheduled.
Beyond politics, the sector’s resilience comes from the sheer range of things that must be maintained, replaced, or modernised. Fighter jets, ships, and vehicles need constant upgrades. Weapons systems evolve every few years — from basic rifles to AI-enhanced optics and targeting platforms. The growing use of drones has created entirely new spending categories: both for offence and for protection against them.
Defence spending isn’t just about preparing for conflict. It’s about maintaining capability, adopting new technology, and ensuring industrial readiness. And that steady flow of contracts, upgrades, and infrastructure projects is what keeps listed defence companies in business — and investors interested — year after year.
Standout local performers
DroneShield has been one of the ASX’s most remarkable performers this year. The company develops counter-drone and autonomous threat detection systems used by defence forces, governments, and critical infrastructure operators worldwide.
Revenue surged 750% year on year to $92.9 million last quarter, with positive cash flow and $212 million in cash on hand. Its sales pipeline now exceeds $2.5 billion, reflecting surging demand for drone “detect and defeat” technology as global defence budgets expand.
Recent AI upgrades and new hardware, have doubled processing speeds and improved targeting accuracy. With 2026 expected to mark a major spending cycle in counter-drone solutions, DroneShield is positioning itself as a global leader in the shift toward software-enhanced defence systems.
Meanwhile, Electro Optic Systems has rebounded sharply after several difficult years. The Canberra-based defence and space technology company secured over $200 million in new orders, including a $108 million contract with the Australian Defence Force for remote weapon systems.
EOS has positioned itself as a global leader in counter-UAS (unmanned aerial systems) and directed-energy weaponry, both of which are attracting attention as countries invest in drone defences and space-based surveillance.
Why the rally may not be just momentum
Unlike some of the market’s trendier themes, defence isn’t driven by hype or speculation.
It’s a long-term growth sector, though one that can move in cycles as government priorities shift.
What sets it apart is that the demand is grounded in reality: real budgets, real equipment, and real profits. The spending is tangible — not just future promises — and it filters through to manufacturers, engineers, developers, and service providers across the supply chain.
Replacement programs for aircraft, surveillance and weapons systems are multi-year to decades in nature. Once contracts are awarded, companies benefit from stable recurring revenues and long-term service agreements — characteristics that investors usually associate with infrastructure, not technology.
For investors whose circle of competence doesn’t stretch deep into defence technology, exchange-traded funds (ETFs) offer a straightforward way to gain diversified exposure to the theme.
Two standouts on the ASX are the VanEck Global Defence ETF and the Betashares Global Defence ETF (ASX: ARMR).
DFND has surged more than 95% since its launch in late 2024, holding companies such as Palantir Technologies, RTX Corp, and Leonardo SpA, which are major players in aerospace, cybersecurity, and military AI. ARMR is not far behind, up over 70% in a similar time frame, with exposure to defence leaders including Lockheed Martin and Northrop Grumman.
These ETFs give investors access to hundreds of billions in global contracts, spanning fighter jets, missile systems, space programs, cyber operations, and intelligence platforms. That broad exposure has helped them outperform the ASX 200 by a wide margin this year, reflecting the sector’s growing momentum rather than short-term market noise.
Thinking beyond the headlines
Defence isn’t an easy space to cheer for, but it’s becoming impossible to ignore.
The combination of innovation, government commitment, and national security priorities has turned it into one of the most durable growth themes on the ASX.
The lesson here isn’t about chasing the latest headline or trying to guess which defence stock rallies next. It’s about understanding where sustained capital is flowing — and why.
When governments around the world sign decades-long contracts and reshape entire industries around new technologies, it’s worth paying attention.
For investors, the takeaway is simple. Whether through a diversified ETF or a few select ASX names, the defence sector represents a rare case of long-term demand meeting long-term funding.
In a market that often swings from hype to panic, that kind of predictability can be a powerful ally.
