Defence Finance Monitor Digest #6
Defence Finance Monitor provides in-depth analysis of the defence industry and strategic policy areas most relevant to investors. It supports financial professionals in interpreting the evolving criteria of Europe’s strategic autonomy, identifying sectors and companies aligned with NATO, EU policy frameworks, and the emerging ESG paradigm centred on Energy, Security, and Geostrategy. DFM highlights long-term investment opportunities linked to Europe’s rearmament and industrial modernisation, with particular attention to entities positioned to benefit from EU programmes such as EDF, PESCO, and SAFE. It decodes regulatory frameworks including SFDR and the EU Taxonomy, grounding all analysis in official sources with an emphasis on compliance, clarity, and actionable insight. DFM focuses exclusively on companies operating within liberal democracies and on sectors that enhance the strength and resilience of open societies—wherever they are—vis-à-vis authoritarian competition, with a primary focus on Europe.
European Defence ETFs Expand as Strategic Autonomy Gains Investment Momentum
One of the core areas of analysis for Defence Finance Monitor has long been the intersection between Europe’s defence transformation and capital markets. The recent acceleration in the creation of defence-focused exchange-traded funds (ETFs) in Europe marks a significant development in this space—both financially and strategically. As EU and NATO member states commit to multi-decade rearmament programmes, institutional investors are increasingly channelling capital into defence-linked instruments that offer diversified exposure to the companies underpinning Europe’s evolving security architecture.
The iShares Europe Defence UCITS ETF: Structured Exposure to Europe's Defence Industry
The iShares Europe Defence UCITS ETF (DFEU) is a physically replicating exchange-traded fund designed to offer targeted exposure to the European defence sector. It tracks the STOXX Europe Targeted Defence Index, which includes publicly listed European companies deriving a significant portion of their revenue from military equipment and related services. The index focuses on firms within the STOXX Europe All Cap universe that meet minimum thresholds of defense-related revenue, ensuring a high degree of relevance to the sector. The fund was launched on 23 May 2025, is domiciled in Ireland, and is listed on multiple European exchanges including Euronext Amsterdam and Xetra. With a Total Expense Ratio of 0.35% and an accumulation income policy, the ETF reinvests earnings rather than distributing them. DFEU is classified as Article 6 under the Sustainable Finance Disclosure Regulation (SFDR), applying specific ESG filters such as the exclusion of companies involved in controversial weapons or those violating the UN Global Compact principles.
PESCO’s Sixth Wave and Europe’s Strategic Bet on Disruptive Defence Technologies
The sixth wave of PESCO projects, formally launched by the Council of the European Union on 27 May 2025, marks a significant advancement in the EU’s ambition to develop strategic autonomy through collaborative defence innovation. The 11 new initiatives approved under the Permanent Structured Cooperation (PESCO) framework bring the total number of ongoing projects to 75, underscoring a consistent political and operational commitment by the 26 participating member states. While PESCO has traditionally focused on improving interoperability, readiness, and joint capability development, this latest wave introduces a notable shift toward cutting-edge technologies that carry both military and industrial implications. Specifically, the inclusion of quantum systems and directed energy capabilities points to a deliberate strategic pivot towards emerging and potentially disruptive domains of future conflict.
The Future of Warfare in 2030
“The Future of Warfare in 2030,” published by the RAND Corporation and authored by Raphael S. Cohen and colleagues, provides an extensive forecast of how warfare is likely to evolve by 2030, focusing on implications for the U.S. Air Force and the broader joint force. The study critiques the U.S. military's historical record of failed conflict prediction and presents an integrated framework to overcome those limitations. The authors define warfare broadly, encompassing conventional battles, gray-zone activities, cyber operations, and the use of strategic deterrents. Their methodology incorporates more than three dozen geopolitical, economic, environmental, legal, informational, and military trends. The study concludes that the United States will face fixed adversaries but shifting alliances, multiple regional theaters of potential conflict, diversified types of warfare, and diminishing military superiority. These findings lead to the conclusion that the U.S. must reassess its strategic posture and adopt a more agile, resilient force structure while accepting a higher level of strategic ambiguity and risk.
European Defence Integration in Focus: The 2025 EDF Calls and Flagship PESCO Projects
European security has entered a new era of urgency. Russia’s war against Ukraine shattered post-Cold War assumptions and spurred a historic increase in defence efforts across the EU. Member states are drastically hiking budgets and reversing long-standing policies – Germany, for example, reached 2% of GDP on defence in 2024, making it Europe’s largest spender. According to NATO and EU data, EU members’ combined defence expenditure rose to about €326 billion in 2024 (≈1.9% of GDP) – a 79% real increase since 2014. This “Zeitenwende” has extended beyond budgets: Europe has sent unprecedented military aid to Ukraine and is urgently replenishing depleted stockpiles. The central question now is whether Europe can translate this spending surge into long-term capability gains and reduce its reliance on external protectors.
NATO Capability Planning and Implications for the European Defence Industry
NATO’s current capability planning is centered on sharpening the Alliance’s military edge across all domains. Key capability priorities – notably Joint Intelligence, Surveillance and Reconnaissance (JISR), Integrated Air and Missile Defence (IAMD), and the adoption of Multi-Domain Operations (MDO) – are guiding how Allies invest in technology and procure new systems. These priorities are not only driven by the evolving threat landscape (from drones to hypersonic missiles and cyber attacks) but also by NATO’s ambition to synchronize efforts across land, air, maritime, space, and cyber domains. Importantly, Europe’s defence industry is responding to these signals: prime contractors, system integrators, and advanced tech companies are recalibrating their strategies to align with NATO’s needs. European Union mechanisms like the European Defence Fund (EDF) and Permanent Structured Cooperation (PESCO) further complement NATO’s plans by funding collaborative R&D and capability development, ensuring that European nations develop interoperable, next-generation equipment in line with Alliance requirements. In this briefing, we analyze each of NATO’s major capability focus areas and draw out actionable insights on future procurement directions, key technology areas, and strategic implications for industry stakeholders.