As geopolitical tensions flare around the world, the financial industry is taking advantage of a surge in defense spending by launching a new wave of exchange-traded funds (ETFs) focused on companies involved in national security, military technology and defense infrastructure.

There has been a noticeable turnaround in the investment community in recent months. While cryptocurrencies once dominated the headlines with the launch of various crypto-focused ETFs, the rapidly changing geopolitical landscape has shifted investor interest to defensive ETFs.

The move reflects a broader response to escalating global instability, including ongoing conflicts such as the Russia-Ukraine war, rising tensions in the Middle East, disputes in the South China Sea and growing concerns about cybersecurity threats.

A recent report by the Stockholm International Peace Research Institute (SIPRI) indicated that global military spending increased by 7 percent to US$2.43 trillion in 2023, the largest annual increase since 2009. so far, with projections suggesting it could reach US$3.1 trillion by 2030.

Speaking to InvestorDaily, Shane Oliver, Chief Economist at AMP, said: "The peace dividend of the 1990s began to give way to a new Cold War in the years just before the pandemic, but has unfortunately picked up afterwards as sees from the conflict in Ukraine and perhaps the Middle East. This is also evident in the reversal of globalization and the trade wars that began under Trump 1.0.”

"There is now an increase in defense spending in favor of arms manufacturers, many of which are listed on the stock markets. At the same time, investors are looking for protection against heightened military conflict that could affect other investments,” Oliver said.

Just last week, Global X launched its Defense Tech ETF (ASX: DTEC) on Australian shores, providing exposure to cutting-edge technologies driving the future of warfare, including robotics, cyber security systems and artificial intelligence.

VanEck, which launched its own defense ETF (ASX: DFND) in September, was the first to introduce a defense-focused product on the ASX, highlighting the growing importance of the sector given growing global volatility.

This week, Betashares joined the trend, unveiling its Global Defense ETF (ASX: ARMR) . The fund provides access to a portfolio of up to 60 companies that derive more than 50 percent of their revenue from the defense industry.

The rise in defense ETFs reflects a reality that many investors are beginning to accept – global military spending is increasing and shows no signs of slowing.

VanEck's managing director for the Asia-Pacific region, Ariane Neuron, acknowledged this change, noting, “Unfortunately, the world has changed since the days of celebrating the peace dividend. While the countries extolled the economic benefits of reduced defense spending, they increased military spending.

Betashares CEO Alex Winokur echoed that sentiment, highlighting "strong forecasted revenue and cash flow growth" for many companies in ARMR's ​​portfolio, driven by rising global defense spending.

At the same time, investors should be cautious, Oliver urged.

He cautioned that while the launch of defense-focused ETFs "makes sense" and is "a sign of the times," investors "just have to be careful that like the first Cold War, it's going to wax and wane over time, which leading to a lot of volatility in defense stocks'.

"They should be careful buying after they've already had a big jump and they may become overvalued and loved."