ASX defence stocks might be flying under the radar, but analysts believe they could be the next big investment opportunity.

At the recent ASX Investor Day in Sydney, industry experts highlighted the significant tailwinds driving the defence sector globally. The growing consensus is that a worldwide boost in defence spending is reshaping how investors view mining stocks and industrial equities tied to security and military contracts.

Why is Defence Gaining Investor Interest?

Analysts cited several macroeconomic and geopolitical reasons behind this emerging trend:

• Many governments are increasing military budgets due to concerns over the US’s shifting foreign policy.
• The US has urged NATO allies to spend up to 5% of GDP on defence.
• China and Russia’s growing alliance is prompting neighbouring countries to fortify their military capabilities.

Amid these dynamics, Australia’s role in international defence alliances like AUKUS has also come into sharper focus. The US is currently reviewing its commitment under this agreement, urging Australia to step up its military expenditure.

Let’s now explore one ASX-listed defence company and two newly launched defence ETFs that are gaining investor traction.

Austal Ltd (ASX: ASB)

Established in 1988, Austal is a Perth-based shipbuilder serving major navies around the world. Its operations span the US, Vietnam, the Philippines, and Australia.

The Austal share price recently hit an all-time high of $6.38, reflecting increased investor confidence and market momentum. Over the last year, the stock has surged 167%, vastly outperforming many other ASX industrial and defence shares.

Recent excitement stemmed from reports that a South Korean company is seeking to increase its stake in Austal. The company is also set to join the S&P/ASX 200 Index in the June rebalance.

Macquarie has rated Austal as “Outperform,” though the current share price is above their latest 12-month target of $4.75.

VanEck Global Defence ETF (ASX: DFND)

Launched in September 2024, the VanEck Global Defence ETF has delivered a 68.22% return since inception. Trading near its all-time high, the ETF tracks the MarketVector Global Defence Industry Index.

Key facts:

• 29 global holdings
• 2% exposure to US stocks
• Sector allocation: 68.8% aerospace & defence, 19.6% professional services, 10.3% software

Top holdings include:

• Palantir Technologies
• Leonardo SpA
• RTX Corp
• Thales SA
• Hanwha Aerospace (which is also linked to Austal)

The ETF has a management fee of 0.65% and distributes dividends annually.

Betashares Global Defence ETF (ASX: ARMR)

Another entrant in the ASX ETF space is Betashares ARMR, launched in October 2024. It has delivered a 52.12% return to date and is also trading near a record high.

ARMR tracks the VettaFi Global Defence Leaders Index and provides exposure to up to 60 companies deriving over half their revenue from defence technology or equipment.

Highlights:

• 7% sector allocation to aerospace & defence
• 5% of holdings in US stocks
• 55% management fee

Top holdings include:

• Rheinmetall AG
• Palantir Technologies
• BAE Systems
• Safran SA
• Raytheon Technologies

Final Thoughts

Increased global defence spending could be a strong tailwind for both individual defence companies like Austal and sector-specific ETFs like DFND and ARMR. With growing geopolitical tensions and rising military budgets, ASX defence stocks might soon become core components of diversified portfolios.

As you explore stocks to look out for in the current market, consider adding mining companies in Australia that support the defence sector or directly benefit from increased government contracts and capital expenditure.

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