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Two FTSE 100 stocks that are booming in my Stocks and Shares ISA right now are BAE Systems and Rolls-Royce. They’re up 60% and 56%, respectively, so far this year.
Yesterday (2 June), they got another boost as Prime Minister Keir Starmer announced a £15bn fund to upgrade the military. He said the UK must be “ready” for war against Russia, pledging to hike defence spending to 3% of GDP — up from 2.3% today — by the next parliament.
Whether or not this is realistic given the dire state of the UK’s finances is another matter. But the message echoes what’s being said by European leaders, which is that military spending is going to increase substantially over the next decade.
The question for investors is whether all this is already priced into UK defence stocks. The FTSE 250‘s Chemring, which jumped 7% today, is at a 14-year high. Meanwhile, Babcock International from the FTSE 100 is up 107% this year alone!
A basket of shares
My view is that it could be dangerous chasing individual defence stocks right now. Not all are guaranteed to keep surging.
Therefore, it might be better to consider a defence ETF that gives exposure to a wide range of different companies. One I like the look of is the HANetf Future of Defence ETF (LSE: NATO). It “provides exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending“.
The ETF contains 61 different firms, with the top holding — Germany’s Rheinmetall — only accounting for around 5.4% of the portfolio. Other top holdings include top US cybersecurity stocks like Fortinet and CrowdStrike, as well as BAE Systems.
One stock that might stand out is Palantir Technologies, the AI software giant. However, the company is deeply integrated into the defence industry through its advanced data analytics and artificial intelligence (AI) platforms. These are used by the US and UK armies, CIA, FBI, and more.
Top 10 holdings (June 2025)
| Weight | |
|---|---|
| Rheinmetall | 5.36% |
| Safran | 5.35% |
| Palantir Technologies | 5.30% |
| BAE Systems | 4.91% |
| CrowdStrike | 4.81% |
| Palo Alto Networks | 4.43% |
| Cisco Systems | 4.41% |
| RTX | 4.24% |
| Fortinet | 4.08% |
| General Dynamics | 3.93% |
Valuation considerations
Now, I should point out that some of these stocks are trading very highly today. Palantir, for example, is currently sporting an insane price-to-sales ratio of 105! Therefore, some volatility is to be expected, especially if stock markets head south.
Another issue is high concentration in two sectors (defence and cybersecurity). If one or both of these fall out of favour with investors, then the ETF could underperform for a while.
However, it’s also worth mentioning that not all the stocks appear overvalued. Tech firm Cisco Systems is trading at a forward price-to-earnings multiple of just 16.
Analyst Ben Reitzes recently called Cisco “the sovereign AI player no one is talking about“, as it has an emerging role in building cloud-based AI infrastructure for governments like Saudi Arabia and the United Arab Emirates.
Looking ahead
Another positive here for me is that the ongoing fees are just 0.49% per year, according to Hargreaves Lansdown. I think that’s pretty reasonable (some thematic ETFs charge much than this).
Overall, I like the focus on the future of defence, with the ETF providing exposure to AI and cybersecurity as well as traditional arms contractors. And despite the share price rising 45% year to date, I think this ETF will head higher in the years ahead.
