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Jacob Falkencrone
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AI weapon systems & national security: Are they the next big investment opportunities?
Investment theme
Saxo Group
Military budgets are growing fast. In 2024, global defence spending reached a record USD 2.7 trillion, up 9.4% from the previous year, the fastest rise since the end of the Cold War. And it’s not just jets and missiles being funded. It’s code, chips, and algorithms.
As AI transforms the tools of national defence, a new category of companies is emerging: those that design the software behind autonomous weapons, surveillance systems, and cyber infrastructure. Some are already backed by private capital, while others are starting to show up in defence ETFs and public markets.
This shift is drawing attention from investors who once stayed away from the defence industry.
What is national security and why is it important to investors?
National security refers to a country’s ability to protect itself from internal and external threats. Traditionally, this meant maintaining a strong military to deter invasions or attacks. Today, it also includes defending digital infrastructure, securing supply chains, and ensuring access to critical technologies, from satellites and semiconductors to energy grids and AI systems.
As the world grows more interconnected and geopolitically fragmented, governments have expanded their definition of what must be protected. A cyberattack on a hospital, a rare earth embargo, or a data breach at a defence contractor can now prompt a national-level response.
This broader view of security is reshaping public budgets. Countries are increasing defence spending not only to modernise weapons but also to fund next-generation capabilities such as artificial intelligence, space-based assets, and cyber command infrastructure.
This shift is already affecting how capital flows into defence-linked technologies and why defence ETFs are adjusting their scope to include firms at the intersection of national security and innovation.
The role of artificial intelligence in national security
Artificial intelligence is rapidly changing how countries plan, detect, and respond to threats. Instead of reacting after an incident occurs, AI tools help governments act earlier by analysing massive volumes of data to identify patterns, locate vulnerabilities, and simulate possible attacks (both physical and digital) before they happen.
AI in warfare powers real-time surveillance systems, automates drone navigation, and helps decision-makers process battlefield intelligence. AI weapon systems—also called autonomous weapons—can track, identify, and engage targets without human intervention. Some are fully automated, while others operate under strict oversight, with humans reviewing final decisions.
The main difference from earlier military technology is not in the weapon itself but in how information is processed. Where a radar once fed data to a human operator, an AI model might now make decisions in milliseconds. This raises practical and ethical questions: when should human control be mandatory? How should AI in warfare be regulated? And how can misuse or escalation be prevented?
Despite these challenges, defence spending in AI continues to rise. Governments are funding next-generation platforms, intelligence agencies are modernising threat detection systems, and defence contractors are partnering with software firms to build AI-enhanced infrastructure. Also, startups are developing dual-use technologies that serve both civilian and military functions.
This shift is expanding what falls under the defence investment theme. It now includes not just hardware but also the data, algorithms, and infrastructure powering intelligent systems, making AI a growing area of interest for investors focused on long-term security trends.
How to gain exposure: Defence stocks and ETFs
Defence investing has traditionally focused on established contractors with long-term government contracts and steady procurement cycles. Today, the sector also includes firms building AI systems, cyber platforms, and advanced sensors that support modern battlefield operations.
Defence stocks
Many publicly listed companies generate a significant portion of their revenue from defence. These firms support a wide range of missions, from aerospace and naval systems to surveillance software and cybersecurity platforms.
Examples of defence-related stocks include:
- Lockheed Martin (LMT). Aircraft, missiles, and space systems
- Northrop Grumman (NOC). Autonomous systems, sensors, and cyber defence
- RTX (RTX). Advanced defence electronics and missile systems
- General Dynamics (GD). Armoured vehicles and submarines
- BAE Systems (BAESY). UK-based multinational with a wide defence portfolio
- Leonardo (LDO.MI). Italian firm active in aerospace and cybersecurity
- Safran SA (SAF.PA). French aerospace and defence group specialising in aircraft engines, avionics, and navigation systems
- Palantir Technologies (PLTR). Big data analytics used in intelligence and security
- SAAB AB Ser. B (SAAB-B.ST). Swedish company developing fighter jets, radars, and defence electronics
- L3Harris Technologies (LHX). Communication and surveillance systems
While some of these stocks are tied to traditional defence platforms, others are increasingly involved in dual-use or AI-enhanced technologies. Exposure varies across companies, but all operate within the wider national security and defence sector.
Defence ETFs
ETFs make it easier to gain diversified exposure to the defence sector without picking individual stocks. These funds typically track indices composed of aerospace, military, and security-focused companies, offering a broad view of the industry’s performance.
Popular defence ETFs include:
- VanEck Defence UCITS ETF (DFNS)
- HANetf Future of Defence UCITS ETF (NATO)
- WisdomTree Europe Defence UCITS ETF (EUDF)
- iShares Global Aerospace & Defence UCITS ETF (DFND)
- Global X Defence Tech UCITS ETF (ARMR)
- First Trust Indxx Global Aerospace & Defence ETF (MISL)
- Invesco Defence Innovation UCITS ETF (IVDF)
- SPDR S&P Aerospace & Defence ETF (XAR)
- iShares U.S. Aerospace & Defence ETF (ITA)
- Invesco Aerospace & Defence ETF (PPA)
While some ETFs focus primarily on established aerospace and military contractors, others are evolving to include firms at the frontier of defence innovation, spanning AI, satellite systems, cybersecurity, and robotics.
Opportunities to invest in AI-powered defence
The defence sector is evolving, and artificial intelligence is changing the pace and scope of that evolution. Below are some of the key opportunities attracting long-term capital to this space:
Long-term government demand
Defence budgets are typically set through multi-year planning cycles, aligned with national security strategies. This provides revenue visibility for contractors supplying AI platforms, autonomous hardware, or cloud-based decision systems. These long procurement timelines offer portfolio stability in an otherwise volatile sector.
Structural exposure to innovation
AI in defence isn’t a passing trend. It is embedded in next-generation capabilities, from surveillance and logistics to threat simulation and automated targeting. Companies developing these systems benefit from ongoing demand and are positioned at the edge of high-tech development.
Dual-use potential
Many defence technologies, especially those powered by AI, can serve both military and civilian markets. Satellite imaging, secure communication tools, and advanced robotics are being commercialised in industries such as agriculture, logistics, and energy. This dual-use nature allows for scalable growth beyond defence contracts.
Exposure to geopolitical and fiscal catalysts
Geopolitical instability has made national defence a fiscal priority. Rising tensions in Europe, the Middle East, and the Asia-Pacific are driving higher defence budgets, often with an emphasis on rapid modernisation, AI integration, and autonomous systems. Investors exposed to this trend gain from both global spending growth and regional rearmament cycles.
Dividend income and capital stability
Many established defence contractors generate reliable cash flows and pay dividends. These firms often operate under multi-year government contracts, offering a level of resilience even during economic downturns. This creates potential for defensive income, especially when combined with exposure to high-growth segments like AI and robotics.
Risks of investing in defence and AI weapon systems
The defence industry has long been viewed as a resilient sector, but AI integration introduces new layers of complexity, both ethical and financial.
Here are some of the main risks you should consider before investing:
Ethical concerns and ESG backlash
Autonomous weapons and AI surveillance platforms can raise ethical concerns. Some institutional investors exclude defence from ESG mandates entirely, while others apply screens based on end-use or dual-use potential. Companies linked to AI-enabled targeting or predictive policing may face scrutiny from regulators, shareholders, and activist groups.
Geopolitical unpredictability
While conflict often drives demand for defence technologies, it also increases unpredictability. Trade restrictions, sanctions, or arms embargoes can disrupt supply chains and revenue flows. Companies operating across multiple jurisdictions may face political pressure or export controls.
Budget constraints and spending shifts
Defence budgets are rising globally, but they still depend on political will. Elections, shifting alliances, or changing public sentiment can lead to budget freezes or reallocation toward other priorities (e.g., healthcare or debt reduction). These shifts can affect project funding and long-term contracts.
Regulatory complexity
Companies operating in the AI defence space must comply with tight national and international regulations. The development and export of sensitive technologies often require multiple layers of approval. Delays or breaches can result in fines, restrictions, or reputational damage.
Technology risk and obsolescence
AI systems develop fast, and so do cyber threats. Companies that fail to adapt may see their platforms bypassed by more advanced competitors. Defence clients often demand the latest capabilities, which puts pressure on firms to constantly reinvest in innovation without guaranteed returns.
Should you consider defence investments?
The defence industry is changing. Intelligence, deterrence, and strategy now depend as much on software and algorithms as they do on ships and aircraft.
AI is pushing this transformation forward, helping governments detect threats, automate systems, and respond with precision. Also, the companies building these capabilities are gaining relevance, both in national budgets and global markets.
If you are exploring long-term trends that connect technology, security, and fiscal policy, this is a space worth watching.
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