Picture supply: Getty Pictures
Two FTSE 100 shares which can be booming in my Shares and Shares ISA proper now are BAE Programs and Rolls-Royce. They’re up 60% and 56%, respectively, thus far this 12 months.
Yesterday (2 June), they bought one other enhance as Prime Minister Keir Starmer introduced a £15bn fund to improve the navy. He mentioned the UK have to be “ready” for struggle towards Russia, pledging to hike defence spending to three% of GDP — up from 2.3% right now — by the following parliament.
Whether or not or not that is life like given the dire state of the UK’s funds is one other matter. However the message echoes what’s being mentioned by European leaders, which is that navy spending goes to extend considerably over the following decade.
The query for buyers is whether or not all that is already priced into UK defence shares. The FTSE 250‘s Chemring, which jumped 7% right now, is at a 14-year excessive. In the meantime, Babcock Worldwide from the FTSE 100 is up 107% this 12 months alone!
A basket of shares
My view is that it might be harmful chasing particular person defence shares proper now. Not all are assured to maintain surging.
Subsequently, it may be higher to think about a defence ETF that offers publicity to a variety of various firms. One I just like the look of is the HANetf Way forward for Defence ETF (LSE: NATO). It “supplies publicity to the businesses producing income from NATO and NATO+ ally defence and cyber defence spending“.
The ETF comprises 61 completely different corporations, with the highest holding — Germany’s Rheinmetall — solely accounting for round 5.4% of the portfolio. Different high holdings embody high US cybersecurity shares like Fortinet and CrowdStrike, in addition to BAE Programs.
One inventory that may stand out is Palantir Applied sciences, the AI software program big. Nevertheless, the corporate is deeply built-in into the defence business by means of its superior information analytics and synthetic intelligence (AI) platforms. These are utilized by the US and UK armies, CIA, FBI, and extra.
Prime 10 holdings (June 2025)
| Weight | |
|---|---|
| Rheinmetall | 5.36% |
| Safran | 5.35% |
| Palantir Applied sciences | 5.30% |
| BAE Programs | 4.91% |
| CrowdStrike | 4.81% |
| Palo Alto Networks | 4.43% |
| Cisco Programs | 4.41% |
| RTX | 4.24% |
| Fortinet | 4.08% |
| Normal Dynamics | 3.93% |
Valuation issues
Now, I ought to level out that a few of these shares are buying and selling very extremely right now. Palantir, for instance, is presently sporting an insane price-to-sales ratio of 105! Subsequently, some volatility is to be anticipated, particularly if inventory markets head south.
One other subject is excessive focus in two sectors (defence and cybersecurity). If one or each of those fall out of favour with buyers, then the ETF might underperform for some time.
Nevertheless, it’s additionally value mentioning that not all of the shares seem overvalued. Tech agency Cisco Programs is buying and selling at a ahead price-to-earnings a number of of simply 16.
Analyst Ben Reitzes lately known as Cisco “the sovereign AI participant nobody is speaking about“, because it has an rising function in constructing cloud-based AI infrastructure for governments like Saudi Arabia and the United Arab Emirates.
Trying forward
One other optimistic right here for me is that the continuing charges are simply 0.49% per 12 months, in line with Hargreaves Lansdown. I feel that’s fairly affordable (some thematic ETFs cost a lot than this).
Total, I just like the concentrate on the way forward for defence, with the ETF offering publicity to AI and cybersecurity in addition to conventional arms contractors. And regardless of the share price rising 45% 12 months to this point, I feel this ETF will head larger within the years forward.