Is it possible for defense stocks to shield your portfolio from market turbulence?

Investor interest in defense stocks has increased as the conflict in the Middle East worsens

With the industry offering a unique source of portfolio protection from the escalating conflict in the Middle East, defense stocks may live up to their name.

In the week ending March 6, the Morningstar Global Aerospace and Defense Index, which is made up of international defense and aerospace stocks, dropped 1.43 percent. During the same period, global stocks as determined by the MSCI ACWI Index fell 3.7 percent. To date, defense stocks have increased by 11.7%, while global stocks have increased by 0.4%.

All markets have faced difficulties due to the conflict's increased oil prices, but investor interest in defense stocks has increased due to the new, less predictable environment.

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Launch your trial. "A lot has changed since the start of the year," Aneeka Gupta, director of macroeconomic research at asset manager WisdomTree, told BFIA. "The rate of attacks and threats has never been higher. The level of geopolitical risk is unprecedented.

"We've seen more momentum towards defense stocks as a whole," Gupta continued.

Due to Trump's intervention in Venezuela, his threats to unilaterally acquire Greenland, and the ongoing conflict with Iran, the early months of 2026 have created an atmosphere in which increased defense spending appears likely.

In Europe, this is especially true. European defense stocks, such as Germany's Rheinmetall (DE:RHM), which is up 2.0 percent, and Italy's Leonardo (MI:LDO), which is up 5 percent, have been among the biggest winners this year.

The primary motivators for defense stocks.

Gupta stated, "I think Europe has the largest under-investment gap in defense." The US is increasing defense spending as well, but it is doing so from a larger base, so the acceleration is less noticeable.

According to Gupta, "Europe is building from a much lower base" due to decades of underinvestment. "Even in Asia, we are witnessing crucial geopolitical flashpoints like the escalating hostilities between China and Japan, as well as the expansion of military budgets in Korea, China, and Japan. A "

Defense stocks have been rising since Trump's return to the White House at the beginning of last year, so the trend is not new. There was a broad response to the president's insistence that other NATO members would need to increase their defense spending; Germany, for instance, is expected to raise its yearly defense budget by more than 60 billion by 2029.

This gave defense stocks a boost last year. Earnings at Rolls-Royce (LON:RR) have increased. released full-year results on February 26 (prior to the start of the Iran conflict), revealing a 38 percent increase in underlying operating profit and a 14 percent increase in revenue.

According to Loredana Muharremi, an equity analyst at Morningstar, "sustained demand across transport, combat and submarine programmes" helped to support this performance.

Should you buy defense-related stocks?

Since the defense industry is currently in great demand, its top brands are more costly than ever. The price/earnings ratio for Lockheed Martins (NYSE:LMT) increased from about 14 in September 2023 to over 30 at the beginning of March 2026, according to data from Macrotrends.

Many people think that the sector's current tailwinds are structural, which is why the valuation has increased. The world is on guard that the rules-based order that kept the world largely peaceful for decades can no longer be relied upon, even if the US-Iran conflict and the war in Ukraine are quickly resolved.

It is highly likely that increases in the defense budget will continue.

That might change: According to Terry Tanaka, portfolio manager at Fidelity European Trust, a recession might force European economies to spend more on social welfare in the upcoming years, which might leave less money available to raise defense spending.

"Defense spending is going to be an easy target if we get a recession and the social spending requirements come up, especially if the war in Ukraine has already ended," he stated.

However, aside from this speculative situation, the majority of experts concur that increased defense spending is a long-term change, particularly in Europe.

How to buy defense stocks.

For investors who prefer to choose the best stocks themselves, defense and aerospace firms like Lockheed Martin, Rolls-Royce, and Rheinmetall are clear entry points.

If you would rather invest in funds, you might want to look into an exchange-traded fund (ETF) or thematic fund that focuses on the industry. Some choices are as follows.

Global X Defence Tech UCITS ETF (LON:ARMG) invests in businesses positioned to profit from defense technology companies; VanEck Defense UCITS ETF (LON:DFNG) provides broad exposure to global defense and cybersecurity stocks; WisdomTree Europe Defence UCITS ETF (LON:WDEP) holds European defense stocks; and HANetf Future of Defence Indo-Pac ex-China UCITS ETF (LON:ADEF) provides exposure to rising defense spending trends in Indo-Pac countries, excluding China.