The quiet armour beating every headline-driven defence trade

Hostilities around the Strait of Hormuz in March sent BAE Systems shares spiking and on to a one-year high by 18 March, as investors priced in a bigger American and European defence budget. Six months on, the trade has unwound. By the end of summer, markets concluded the worst of the escalation had passed. It's a pattern that's repeated across the sector all year: a geopolitical headline produces a spike, and the spike fades once the news cycle moves on.

The companies that haven't followed that pattern tend to share one feature: defence is only part of what they do. The theme splits into three parts, the prime contractors whose share prices move with each news cycle, the diversified engineering groups whose defence business sits alongside several other income streams, and the specialist component makers who supply into almost every platform regardless of which prime wins the contract.

At the diversified end, Rolls-Royce is the clearest example. Its defence arm, covering military engines, naval propulsion and submarine nuclear reactors, sits alongside a Civil Aerospace business benefiting from a hot aftermarket cycle, and a Power Systems division increasingly levered to data centre power generation for AI infrastructure.

Smiths Group's diversification has actually changed shape this year. Having sold its former Smiths Detection unit to CVC Capital Partners for £2bn in June, it's repositioned around John Crane's sealing and flow management technology and Flex-Tek's thermal and fluid management products, both spanning energy, construction, industrial and aerospace applications. Unglamorous inputs, seals, hoses, thermal components, but ones that pivot easily between whichever sector is spending, defence, AI-driven power infrastructure, or industrial energy. The shares are up around 16% this year, and have climbed around 89% over the past five years.

For investors who want broader exposure rather than picking individual names, defence-focused exchange-traded funds spread that single-contract risk across dozens of holdings. Options include the iShares Global Aerospace & Defence UCITS ETF, the HANetf Future of Defence UCITS ETF, and the VanEck Defense UCITS ETF, for a more defence-pure, US-tilted alternative.

Key points to consider

Defence spending is politically driven, which cuts both ways. Budgets can be cut as easily as they're raised, and election cycles, procurement delays and contract renegotiations all sit outside a company's own control, as BAE's own round trip this year shows. The headline-driven volatility that hit the primes this year can just as easily return.

Fees are more reasonable here than in some thematic spaces. Defence ETFs cluster between 0.35% and 0.55% a year, cheaper than many other thematic trackers, though still a real premium over a plain vanilla index fund.

This is also a sector built on long programme cycles rather than quick turnarounds. Defence contracts typically run for years or decades once awarded, so the underlying businesses are structured around multi-year visibility, not quarterly news. Share prices can still swing sharply on a single geopolitical headline in the short term, as BAE's shareholders found out this year, but the investment case for the diversified names plays out over a much longer horizon than any one conflict.

Companies mentioned in this article: BAE Systems, Rolls-Royce Holdings, Smiths Group, Chemring Group, iShares Global Aerospace & Defence UCITS ETF, HANetf Future of Defence UCITS ETF, VanEck Defense UCITS ETF