AI in defence and national security: What investors should know

How to gain exposure: Defence stocks and ETFs

Defence investing has traditionally focused on established contractors with long-term government contracts and steady procurement cycles. Today, the sector also includes firms building AI systems, cyber platforms, and advanced sensors that support modern battlefield operations.

Defence stocks

Many publicly listed companies generate a significant portion of their revenue from defence. These firms support a wide range of missions, from aerospace and naval systems to surveillance software and cybersecurity platforms.

Examples (for illustration only, not a recommendation and not exhaustive) include:

• Lockheed Martin (LMT). Aircraft, missiles, and space systems
• Northrop Grumman (NOC). Autonomous systems, sensors, and cyber defence
• RTX (RTX). Advanced defence electronics and missile systems
• General Dynamics (GD). Armoured vehicles and submarines
• BAE Systems (BAESY). UK-based multinational with a wide defence portfolio
• Leonardo (LDO.MI). Italian firm active in aerospace and cybersecurity
• Safran SA (SAF.PA). French aerospace and defence group specialising in aircraft engines, avionics, and navigation systems
• Palantir Technologies (PLTR). Big data analytics used in intelligence and security
• SAAB AB Ser. B (SAAB-B.ST). Swedish company developing fighter jets, radars, and defence electronics
• L3Harris Technologies (LHX). Communication and surveillance systems

While some of these stocks are tied to traditional defence platforms, others are increasingly involved in dual-use or AI-enhanced technologies. Exposure varies across companies, but all operate within the wider national security and defence sector.

Defence ETFs

ETFs can provide diversified exposure to the defence sector without requiring investors to pick individual stocks. These funds typically track indices composed of aerospace, military, security or defence technology companies, offering a broad view of the industry’s performance.

Examples of defence-themed ETFs, depending on investor location and platform availability, include:

• VanEck Defense UCITS ETF (DFNS)
• HANetf Future of Defence UCITS ETF (NATO)
• WisdomTree Europe Defence UCITS ETF (WDEF/WDEP/EUDF, depending on listing)
• iShares Global Aerospace & Defence UCITS ETF (DFND)
• Global X Defence Tech UCITS ETF (ARMR)
• First Trust Indxx Global Aerospace & Defence UCITS ETF (MISL/ICBM/FTGA, depending on listing)
• Invesco Defence Innovation UCITS ETF (IVDF)
• SPDR S&P Aerospace & Defence ETF (XAR)
• iShares U.S. Aerospace & Defence ETF (ITA)
• Invesco Aerospace & Defence ETF (PPA)

Some ETFs focus primarily on established aerospace and military contractors, while others include companies linked to defence technology, AI, satellite systems, cybersecurity and robotics. Investors need to review the fund's methodology and holdings, as exposure can vary significantly.

Potential investment themes in AI-powered defence

The defence sector is evolving, and artificial intelligence is changing the pace and scope of that evolution. Below are some of the key opportunities attracting long-term capital to this space:

Long-term government demand

Defence budgets are typically set through multi-year planning cycles, aligned with national security strategies. This can provide some contract visibility for certain suppliers, but outcomes depend on budgets, programme execution, regulation, export controls and contract terms—and listed share prices can still be volatile.

Structural exposure to innovation

AI is becoming part of some next-generation defence capabilities, from surveillance and logistics to threat simulation and targeting support. Companies active in these areas may benefit from demand for advanced systems, but revenue depends on contract wins, procurement cycles, regulation, competition and execution.

Dual-use potential

Some AI-enabled defence technologies can also have civilian applications, including satellite imaging, secure communications and robotics. This can broaden addressable markets, but commercialisation depends on customer adoption, pricing, regulation and competition.

Exposure to geopolitical and fiscal catalysts

Geopolitical instability has made national defence a fiscal priority in many countries. Rising tensions in Europe, the Middle East, and the Asia-Pacific have contributed to higher defence budgets, often with an emphasis on modernisation, AI integration, and autonomous systems. Investors with exposure to this theme may be affected by global spending trends and regional rearmament cycles, as well as political decisions, valuation and execution risks.

Dividend income from mature contractors

Some established defence contractors have historically generated cash flows and paid dividends, but dividends can be reduced or suspended and share prices can still fall. Combining mature contractors with AI, cyber or robotics exposure may change the risk and return profile rather than automatically adding stability.

Risks of investing in defence and AI weapon systems

The defence industry is often viewed as a resilient sector, but AI integration introduces new ethical, regulatory and financial complexity.

Here are some of the main risks you should consider before investing:

Ethical concerns and ESG backlash

Autonomous weapons and AI surveillance platforms can raise ethical concerns. Some institutional investors exclude defence from ESG mandates entirely, while others apply screens based on end-use or dual-use potential. Companies linked to AI-enabled targeting or surveillance applications may face scrutiny from regulators, shareholders, and activist groups.

Geopolitical unpredictability

While conflict often drives demand for defence technologies, it also increases unpredictability. Trade restrictions, sanctions, or arms embargoes can disrupt supply chains and revenue flows. Companies operating across multiple jurisdictions may face political pressure or export controls.

Budget constraints and spending shifts

Defence budgets are rising globally, but they still depend on political will. Elections, shifting alliances, or changing public sentiment can lead to budget freezes or reallocation toward other priorities (e.g., healthcare or debt reduction). These shifts can affect project funding and long-term contracts.

Regulatory complexity

Companies operating in the AI defence space must comply with tight national and international regulations. The development and export of sensitive technologies often require multiple layers of approval. Delays or breaches can result in fines, restrictions, or reputational damage.

Technology risk and obsolescence

AI systems develop fast, and so do cyber threats. Companies that fail to adapt may see their platforms bypassed by more advanced competitors. Defence clients often demand the latest capabilities, which puts pressure on firms to constantly reinvest in innovation without guaranteed returns.

Defence investments in context

Defence and national security exposure now extends beyond ships and aircraft to software, cyber tools, sensors, data infrastructure and AI-enabled systems. This broadens the investment theme but also adds ethical, regulatory, geopolitical, and valuation risks.

If you are analysing this area, relevant factors to assess include source of revenue, contract visibility, dual-use exposure, valuation, concentration risk, ethical constraints and regulatory change.