Defence ETFs and Investing in the Defence Sector

• Summary
• Defence ETFs are thematic funds that invest in shares of companies linked to the defence sector, including aerospace, shipbuilding, defence electronics and military equipment.
• Defence ETFs track specific defence indices and trade on stock exchanges, which allow investors to buy and sell units during market hours.
• India’s defence production reached ₹1.78 lakh crore in FY 2025–26, while defence exports rose 62.66% to ₹38,424 crore, supporting the growth of companies held by defence ETFs.
• The Ministry of Defence received ₹7.85 lakh crore in the Union Budget 2026–27, including ₹2.19 lakh crore for capital expenditure, making government spending an important factor for defence ETFs.

What are Defence ETFs?

Defence Exchange-Traded Funds (ETFs) are thematic funds that invest in shares of companies linked to the defence sector. These companies may manufacture military equipment, aerospace products, defence electronics or provide related services.

Defence ETFs track an index of such companies and trade on stock exchanges like individual shares. This allows investors to invest in several defence-related companies through a single ETF unit.

How Defence ETFs Work in the Stock Market

Defence ETFs are passive funds that trade on stock exchanges. This is how they work:

• Index Tracking: A defence ETF tracks a specific defence index and holds a basket of stocks based on the index’s constituents and weightings.
• Eligibility Rules: The underlying index sets the eligibility criteria for companies included in the ETF. These may cover industries such as aerospace, shipbuilding, electronics and explosives, along with a minimum share of revenue from defence-related activities.
• Weight Capping: The underlying index determines the weight of each stock, often using free-float market capitalisation. It may also cap the weight of individual stocks to limit concentration in the ETF.
• Periodic Rebalancing: The ETF adjusts its holdings when the underlying index is rebalanced. This can change the stocks included in the ETF and their respective weights.
• Real-Time Trading: Unlike traditional mutual funds that are priced once daily, ETFs trade on stock exchanges throughout the trading day. Investors can buy or sell ETF units at prevailing market prices through a demat and trading account.

Why Invest in Defence ETFs in 2026?

Here is why investors may invest in defence ETFs

• Sector-Focused Exposure: The defence ETFs allow you to invest in multiple companies from the defence sector through one investment.
• Diversification: Instead of investing in only a single defence stock, an ETF spreads the investment across several companies included in its underlying index.
• Easy Trading: Defence ETFs are listed on stock exchanges and can be bought or sold during market hours through a trading and demat account.
• Lower Stock-Picking Effort: Since the ETF follows an index, investors do not have to select and monitor individual defence companies themselves.

Types of Defence ETFs

The defence ETFs can be classified into the following categories in general:

• Broad Defence ETFs: These ETFs include shares of established defence and aerospace companies, which provide you with exposure to several major businesses across the sector.
• Country-Specific Defence ETFs: The portfolios of such ETFs are limited to companies from a particular country or region, such as Indian defence companies included in domestic defence indices.
• Defence Technology and Innovation ETFs: These ETFs include companies developing newer defence technologies, including artificial intelligence, cybersecurity, space technology and advanced electronics, rather than traditional defence equipment. 
• Specialised and Leveraged ETFs: These include either a niche defence theme, such as space and defence, or use leverage to target a multiple of an underlying index’s daily performance. 

How to Invest in Defence ETFs?

You can invest in defence ETFs by following the steps below:

1. Open a Demat and Trading Account: You will need a demat and trading account with a SEBI-registered broker to buy ETF units on a stock exchange.
2. Select a Defence ETF: Compare the available defence ETFs based on factors such as the underlying index, expense ratio, holdings, tracking error, liquidity and past performance.
3. Check the Underlying Index: Read the investment objective and index methodology of the ETFs to understand which defence companies the fund invests in and how the portfolio is structured.
4. Place a Buy Order: Search for the ETF on your broker’s platform, check its live market price and place a buy order. The ETF units can be bought and sold during market hours like shares.
5. Hold and Monitor: Once you have purchased, the ETF units are credited to your demat account. You can monitor the ETF, its underlying index, portfolio changes and performance over time to take necessary actions.

Benefits of Investing in Defence ETFs

Investing in defence ETFs can provide you with the following benefits:

• Exposure to Rising Defence Production and Exports:

India’s defence production reached ₹1.78 lakh crore in FY 2025–26, up 15.6% year-on-year, while defence exports rose to ₹38,424 crore which is up by 62.66%.  ETFs can replicate this expanding base of defence sector companies.

• Participation in a Growing Budgetary Allocation:

The Ministry of Defence received ₹7.85 lakh crore in the Union Budget 2026–27, which is 15.19% higher than the previous year, along with a capital expenditure of ₹2.19 lakh crore. Defence ETFs holding domestic producers can reflect the impact of increased government spending on the sector. 

• Link to Self-Reliant Manufacturing Push:

India now produces around 65% of its defence equipment domestically. The government has allocated ₹1.39 lakh crore for procurement from domestic defence industries in FY 2026–27. This trend supports “Make in India” and the growth of defence manufacturing firms in ETFs.

• Exposure to Global and Strategic Deals:

The Defence Acquisition Council approved procurement proposals worth about ₹1.10 lakh crore in September 2026. This will cover helicopters, radars, marine gas turbines and other defence systems, with around 98% procurement planned from Indian industry. This supports demand for Indian defence manufacturers.

Risks and Challenges in Defence ETF Investing

The following are some key risks associated with defence ETFs:

• Heavy Dependence on Government Spending

The defence sector depends on government spending and orders for new equipment. Changes in procurement plans or spending priorities can affect the sales of companies held by defence ETFs.

• Long Contract and Delivery Cycles

Defence projects often take several years because they involve lengthy approval, production and delivery processes. Delays in contracts or deliveries can affect when companies receive revenue from these projects.

• Sector Concentration and Index Depth

India has a limited number of large companies that mainly operate in the defence sector. Many also have businesses in other industries, which means a defence ETF may have limited exposure to pure defence companies.

• Geopolitical Uncertainty Impact

Defence spending and procurement plans can change with regional conflicts, security concerns and international relations. These changes can affect company orders and lead to price swings in defence ETFs.

Key Investment Strategies for Defence ETFs

You can use different strategies while investing in defence ETFs based on your investment goals, time horizon and risk tolerance. The following are some common approaches:

• Long-Term Holding: You can hold defence ETF units for several years to participate in the growth opportunity of the sector over time. This approach is generally suitable for those who can tolerate short-term price fluctuations.
• Regular Investing: Investing a fixed amount at regular intervals spreads purchases across different market prices. This can reduce the impact of investing the entire amount at a single market price.
• Tactical Allocation: Some investors may allocate a limited part of their portfolio to defence ETFs based on their view of the sector. This allocation can be reviewed as market conditions, valuations or government spending priorities change.
• Managing Concentration: If you add investments from other sectors alongside defence ETFs, it can help you to reduce concentration in one industry. The allocation should depend on your risk tolerance and financial goals.

Factors to Consider Before Investing in Defence ETFs

Before investing in a defence ETF, consider factors that can affect its costs, performance and overall risk.

• Underlying Index: The underlying index tells you which defence companies the ETF can hold and how much weight each company gets. 
• Expense Ratio: Comparing the expense ratio with other defence ETFs can help you to decide between similar funds.
• Tracking Error: An ETF may not deliver exactly the same return as its underlying index. The tracking error shows how much the ETF’s performance has differed from the index.
• Portfolio Holdings: Analyse the companies held by the ETF and the weight given to each one. This helps you assess whether the fund is concentrated in a few defence companies. 
• Trading Liquidity: The trading volume and market liquidity of the ETF affect the buying or selling of units. Low trading activity may make it harder to get the desired price.

Common Mistakes to Avoid in Defence ETF Investing

If you are a beginner, it might be possible to make these mistakes that can be avoided easily with a heads up. Here are a few common mistakes you can avoid while investing in ETFs:

• Ignoring Concentration Risk: Defence ETFs can have large weightings in a small number of companies. Given this, a weak performance from one major holding can therefore affect the returns. 
• Disregarding Expense Ratios and Fees: Thematic or specialised sector ETFs, like Defence ETFs, may have higher costs than broad-market ETFs. These charges can reduce the returns you earn over the long term. 
• Ignoring Liquidity: Trading specialised sector ETFs with low daily volume through market orders can lead to wider bid-ask spreads and less favourable prices. 
• Chasing Past Performance: A short-term rise driven by geopolitical tensions can lead to buying at a peak. You should consider the ETF’s longer-term strategy and performance across different market cycles. 

How To Choose a Defence ETF?

You can select defence ETFs using the method discussed below:

Know Your Goal	Decide the purpose, investment horizon and portfolio allocation.
Shortlist ETFs	Compare Defence ETFs available in India and the indices they track.
Compare Costs	Look at the expense ratio and other fund-related costs.
Check Holdings	Review the companies included and their individual weightings.
Compare Performance	Check returns against the underlying index and tracking error.
Check Liquidity	Look at trading volume to assess how easily units can be bought or sold.

StockGro Practice Approach (Virtual Trading & Learning)

StockGro can be used as a learning and strategy-testing platform while studying market concepts related to defence ETFs. Its Strategy Builder allows users to test investment ideas before committing real money. You can use these tools to study how a defence ETF might respond to different market conditions and review the results of a strategy.

Final Thoughts

Defence ETFs give investors a simpler way to participate in the defence sector without picking individual stocks. However, their focused nature also means sector-specific developments can have a stronger effect on returns.

Therefore, before you invest in them, compare the ETF’s index, holdings, costs, tracking error and liquidity. This can help you understand what you are buying rather than judging a fund only by recent returns.

FAQs