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Shares in defence companies are currently reaching record highs. The war in Ukraine, rising defence budgets, and growing geopolitical unease have propelled the sector from a niche position into the spotlight. Yet investors face a moral dilemma. “Those who invest in arms are profiting from rearmament – and, indirectly, potentially from war,” says Thorsten Fischer, Managing Director and Head of Portfolio Management at Moventum AM. “An investment in defence stocks is therefore far more than just a financial decision.”

From a financial perspective, there are compelling arguments in favour of including such stocks – at least for certain types of investors. The geopolitical landscape has fundamentally changed since Russia's invasion of Ukraine. Europe is debating the return of conscription, Germany’s armed forces are set to receive a special fund of €500 billion, and NATO members are under pressure to increase defence spending to as much as five percent of GDP. For companies like Rheinmetall, Hensoldt or Lockheed Martin, this translates into full order books – and for shareholders: significant price potential.

“But the equation is not so straightforward,” Fischer cautions. Defence stocks are cyclical, politically sensitive, and ethically controversial. A peace deal or political shift could cause contracts to evaporate overnight. Moreover, many institutional investors following ESG criteria are legally or voluntarily required to exclude weapons manufacturers. “This ethical consideration is far from trivial – and one that each investor must make for themselves,” says Fischer.

For those who do opt for defence stocks, a selective allocation can be worthwhile. Although many of these shares have already seen substantial gains, the structural environment continues to offer tailwinds, suggesting further upside potential. “However, investors should be aware: the defence sector is subject to political and societal tensions – and is by no means a guaranteed win,” Fischer emphasises. High volatility is the rule, not the exception.

Anyone considering such an investment should ensure adequate diversification. Instead of investing in individual stocks, broadly diversified defence ETFs may offer a less risky alternative. Furthermore, political developments must be monitored closely. Defence budgets are tied to political will – and that can shift quickly with elections, budget crises or geopolitical turning points.

In addition, investors should honestly assess their own investment profile. “Those who aim to invest sustainably and in line with their values are unlikely to be comfortable with investing in weapons manufacturers,” Fischer notes. On the other hand, those primarily focused on returns may currently find the defence sector to be lucrative – albeit high-risk.

Conclusion: Defence stocks divide opinion – and rightly so. They present opportunities but also carry significant risks and ethical considerations. “The decision for or against such an investment is therefore highly personal,” says Fischer. “Investors must be fully aware of the responsibility that comes with it.”