In the wake of escalating global hostilities, the defense industry is once again in the spotlight, and investors are taking notice. While some may shy away from this sector due to ethical concerns, the reality is that defense spending is on the rise, and those who are paying attention are finding opportunities to capitalize on this trend. But what does this mean for Canada, and how can investors navigate this complex landscape?
A New Era of Global Defense Spending
The defense industry is not solely about weapons; it encompasses a wide range of sectors, from cybersecurity to AI and drone technology. As global tensions rise, countries are increasing their military budgets, and this shift has significant implications for investors. The U.S., traditionally the largest spender, is now signaling a shift in its global defense commitments, leaving a power vacuum that others are eager to fill.
"What makes this particularly fascinating is the way in which the globalization era is unwinding," says Chris McHaney, head of investment management and strategy at Global X Investments Canada. "The U.S. isn't necessarily going to be there to defend everyone going forward." This realization has prompted countries worldwide to bolster their military capabilities, creating a new era of global defense spending.
Canada's Defense Spending and NATO Commitments
Canada, for its part, is making significant strides in meeting its NATO commitments. In 2025, Canada spent $63.4 billion on national defense, and for the first time, it met its NATO target of spending 2% of GDP on defense. This commitment extends beyond just military spending; it includes investments in soldier compensation, bases, facilities, weapons, and more.
"The problem is, in the main, Canada doesn't make those things, and so mostly we import them from primarily the United States but also other NATO allies," explains Brian Madden, chief investment officer with First Avenue Investment Counsel. This reality presents an opportunity for Canadian retail investors to gain exposure to defense stocks indirectly.
Investing in Defense: Opportunities and Considerations
For investors looking to capitalize on the theme of a global defense build-out, there are several options. Investing in large U.S. defense contractors like Lockheed Martin or Northrop Grumman Corp. can provide direct exposure to the defense sector. However, this approach may not be suitable for those seeking a more ethical or socially responsible investment strategy.
"I think retail investors need to decide whether that's going to be the guiding factor in making investment decisions, and then it's a morality judgment," says Madden. "Those who overlook some of these sectors might be leaving money on the table and that's a perfectly valid decision on their part. It's just one that needs to be made with eyes wide open."
An alternative approach is to invest in companies adjacent to the defense industry, such as engineering and construction firms. These companies may not be pure plays on defense, but they are likely to benefit from increased military spending in Canada. For instance, companies like WSP Global, AtkinsRéalis, and Aecon construction could be well-positioned to capitalize on the infrastructure needs arising from Canada's defense commitments.
The Personal Decision
Ultimately, the decision to invest in the defense industry is a personal one. Some investors may be more comfortable with the idea of supporting Canada's defense supply chain to ensure sovereignty, while others may prefer to invest in cybersecurity firms or other sectors that align with their ethical and social values.
"In my opinion, the defense industry is an area that warrants careful consideration and a nuanced approach," says McHaney. "While it may not be the most glamorous sector, it is an essential one, and for those who are willing to look beyond the headlines, there are opportunities to be found."
As global conflicts continue to shape the geopolitical landscape, investors must navigate a complex web of ethical, social, and financial considerations. The defense industry, with its diverse range of sectors and global implications, is one that demands attention and a thoughtful approach. For those who are willing to take the plunge, the rewards could be significant, but it is a decision that should not be made lightly.
