.png)
The Xtrackers Europe Defence Technologies UCITS ETF has arrived onto American shores, and the timing could hardly be more pointed.
DWS, the German asset management giant, originally launched XDEF on European exchanges back in August 2025. Now the fund is cross-listing onto NYSE Arca and other U.S. venues, giving American investors direct access to what has become one of the most politically charged investment themes of the decade: European rearmament.
The Spending Tsunami
The numbers tell a stark story. EU member states spent €343 billion on defence in 2024, marking the tenth consecutive year of increases. That figure is projected to hit €381 billion in 2025, pushing the bloc past the 2% of GDP threshold for the first time in the post-Cold War era.
But 2% is already yesterday's target.
At the June 2025 NATO Summit in The Hague, allies committed to spending 3.5% of GDP on core defence requirements by 2035, with an additional 1.5% earmarked for defence-related infrastructure. Meeting that target would require an additional €254 billion annually, bringing total European defence expenditure to roughly €635 billion.
Germany alone has loosened its constitutional debt brake to unlock up to €500 billion in additional defence spending through the mid-2030s. Chancellor Friedrich Merz's government intends to ramp federal defence outlays from 2.4% of GDP in 2025 to 3.5% by 2029. Lithuania plans to spend 5-6% of GDP on defence between 2026 and 2030. Poland is already north of 4%.
The European Commission's March 2025 call for “decisive action" wasn't merely rhetorical. The EU has since created SAFE (Security Action for Europe), a €150 billion rearmament loan fund. The proposed European Defence Industry Programme (EDIP) would channel €1.5 billion in grants by end-2027 to boost cross-border defence procurement.
The Index: Patents Meet Revenue
XDEF tracks the STOXX Europe Total Market Defence Space and Cybersecurity Innovation Index, and the methodology is more sophisticated than the typical sector slice-and-dice.
Companies qualify through two pathways. The traditional route requires deriving at least 25% of revenue from 41 FactSet RBICS sectors associated with defence, space, and cybersecurity. But STOXX adds a second filter: patent exposure. Firms ranking in the top 10% by high-quality defence patents, or dedicating at least 10% of their patent portfolio to relevant technologies, also make the cut.
The patent overlay isn't window-dressing. It captures companies that may not yet show massive defence revenues but are actively innovating in the space. The firms patenting drone countermeasures, satellite communications systems, and cyber defence tools today are the ones likely capturing procurement contracts tomorrow.
As of late December, the index had returned 72% in 2025, outpacing both the broader STOXX Europe 600 and the traditional Aerospace & Defence sector benchmark.
What's in the Box
The top holdings read like a who's who of European defence:
-
BAE Systems (10.0%): Britain's largest defence contractor, with fingers in everything from nuclear submarines to electronic warfare systems.
-
DSV (9.9%): The Danish logistics giant might seem an odd inclusion, but military supply chain capabilities have become a critical bottleneck in European rearmament.
-
Rheinmetall (9.4%): Germany's preeminent weapons maker, whose stock has become shorthand for the European defence trade. The company has announced multiple capacity expansions to meet surging demand for ammunition and armoured vehicles.
-
Thales (6.7%): The French aerospace and defence electronics specialist, particularly strong in radar, communications, and cybersecurity.
-
Leonardo (6.0%): Italy's defence champion, spanning helicopters, cyber, and space systems.
-
MTU Aero Engines (5.8%): The Munich-based aircraft engine manufacturer supplying both military and commercial platforms.
-
Saab (4.9%): Sweden's defence icon, maker of the Gripen fighter and increasingly sophisticated ground combat systems.
The index also captures cybersecurity specialists and space technology firms that pure aerospace-and-defence benchmarks might miss, a nod to the realities of modern warfare where digital and physical domains increasingly blur.
The Fee War Heats Up
DWS has priced XDEF aggressively, debuting at 0.15% TER through August 2026 before reverting to 0.25%. That matches the temporary fee waiver on State Street's SPDR S&P Europe Defense Vision ETF (DFSV) and undercuts BNP Paribas's Bloomberg Europe Defense ETF (BJL8) at 0.18%.
The established players charge considerably more. WisdomTree's Europe Defence ETF (WDEF), which has accumulated over $2.4 billion since its March 2025 launch, carries fees between 0.35% and 0.40%, as do offerings from Amundi, BlackRock, HANetf, and Global X.
The fee compression reflects the intensity of competition in what has become European ETFs' most heated product category. Seven issuers are now fighting over roughly $3.7 billion in European defence ETF assets. WisdomTree's first-mover advantage has proven durable, but latecomers are clearly betting that cost leadership can pry loose market share.
The Investment Case (And the Caveats)
The bull case writes itself: structural spending tailwinds, bipartisan political support, long-duration defence contracts providing revenue visibility, and European governments increasingly prioritizing domestic suppliers over American alternatives.
But European defence remains a concentrated sector. Capacity constraints are real. Lead times for major weapons systems stretch years. Recruiting enough skilled workers to staff expanded production lines has emerged as a binding constraint for several manufacturers. And valuations across the sector have re-rated dramatically, with Rheinmetall trading at multiples that would have seemed ludicrous three years ago.
There's also the question of execution risk at the policy level. Spain has already secured an opt-out from NATO's 3.5% target, capping its spending commitment at roughly 2.1% of GDP. The gap between political pledges and actual budget allocations could prove wider than current enthusiasm assumes.
Still, for investors seeking exposure to what may prove the defining fiscal theme of the next decade in European equities, XDEF offers a differentiated approach. The patent overlay captures innovation that revenue-based screens miss, the fee structure is competitive, and the DWS/Xtrackers brand brings institutional credibility.
Whether you view European rearmament as a tragic necessity or a generational investment opportunity (the honest answer is probably both), the capital is flowing. XDEF is DWS's bid to help direct some of it.
Comments