Defence ETFs gain 17% in one week. Should you add to your portfolio?

Two ETFs – Groww Nifty India Defence ETF and Motilal Oswal Nifty India Defence ETF – gained 17.16% and 17.17% respectively in the said period. A fund of fund based on defence ETF – Groww Nifty India Defence ETF FOF offered 17.69% in the similar time period.

These schemes are benchmarked against Nifty India Defence – TRI, which went up by 17.22% in the similar time period.

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An expert attributes this surge to being driven by rising geopolitical escalations between India and Pakistan. “The rising tensions between India and Pakistan have increased investor interest in defence stocks, and with increased government spending, policy support, and geopolitical factors, it is gaining attention from investors. Ongoing geopolitical tensions continue to make defence a key policy-supported and structurally important sector,” said Shweta Rajani, Head – Mutual Funds at Anand Rathi Wealth Limited.

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The focus on defence stocks came after reports that the Modi government has called a meeting with defence makers. To this Shweta adds, if we look at India’s defence budget, it has nearly tripled over the past decade from Rs 2.29 lakh crore in 2014–15 to Rs 6.81 lakh crore in 2025–26, and now accounts for 13.45% of the total national budget. “Additionally, the government is expected to push for greater indigenous manufacturing of defence equipment for the Indian army, which is likely to benefit domestic defence manufacturers,” she added.

In the last two weeks, these defence sector based ETFs have gained 18% whereas the fund of fund has gone up 19.02% in the last two weeks. The index funds based on the defence sector delivered 18% return in the same period.

According to a report by ETMarkets, the rally in the defence stocks comes in the wake of Operation Sindoor — India’s military response to the April 22 Pahalgam terror attack — which showcased the country’s defence strength using indigenous systems.

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The report adds that in his first national address after the operation, PM Modi called for greater military self-reliance, emphasising India’s growing role in new-age warfare. “We have proven our dominance in modern warfare,” Modi said. “We have always defeated Pakistan on the battlefield. Today, we’ve demonstrated our superiority again. The time has come for ‘Made in India’ defence equipment. We’ve adopted a zero-tolerance policy towards terrorism.”

Commenting on the way forward for the defence sector, the experts said that, looking ahead, we remain optimistic about the defence sector, which is expected to perform well, supported by favourable government policies and long-term capital commitments. “However, it is not advisable to invest solely in any single sector, as sectoral and thematic funds tend to be cyclical in nature. For instance, while defence was among the top-performing sectors from 2023 to mid-2024, it turned into one of the underperformers in the latter half of 2024,” she added.

“We recommend that investors consider actively managed diversified equity funds, such as market-cap-based funds and strategy-based funds, such as value, contra, and focused, as these funds provide broad exposure across sectors and categories, helping reduce concentration risk and offering resilience across market cycles,” Shweta recommended.