Germany’s Next Government Ready to Spend; Defense ETFs Surge
With Germany’s expected new leadership planning a €500 billion infrastructure and defense push, European defense ETFs like EUAD are soaring.
Germany’s next government hasn’t been officially decided, but investors are already betting on a seismic shift in European defense spending via defense exchange-traded funds . The coalition likely to take power, led by Chancellor-in-waiting Friedrich Merz, has outlined plans to loosen debt constraints and pour money into military and infrastructure investments.
The plan would include a €500 billion infrastructure fund over the next decade and allow defense spending above 1% of GDP to bypass Germany’s strict borrowing rules.
Markets have taken notice. Defense-focused ETFs have been on fire this year, with the Select STOXX Europe Aerospace & Defense ETF (EUAD) up 42% year to date, outpacing nearly every other sector. Investors see Europe ramping up military budgets amid mounting uncertainty over U.S. support.
Trump’s NATO Stance Fuels Europe’s Defense Pivot
A major factor behind this shift? Donald Trump. The U.S. president has repeatedly signaled he would not guarantee U.S. protection of NATO allies that don’t meet spending targets. Just last month, Trump suggested he would even “encourage [Russia] to do whatever the hell they want” to NATO members who fail to pay their fair share.
For Germany, which has long relied on U.S. security guarantees, that’s a wake-up call. “In view of the threats to our freedom and peace on our continent, the rule for our defense now has to be 'whatever it takes,'" said Germany’s Merz, underscoring the shift toward self-reliance.
Defense ETFs Gain
The impact on European defense stocks has been clear. EUAD, which tracks stocks of Europe-based aerospace and defense firms, like Airbus, Safran and Rolls-Royce, has exploded higher.
European markets more broadly have been strong, with Vanguard European Stock Index Fund ETF (VGK) up 14% this year, far ahead of the S&P 500’s modest losses.
EUAD has seen sizable inflows over the past few days, bringing its assets under management up to $120 million. U.S.-listed, Europe-focused ETFs as a whole have seen inflows of $2 billion, led by VGK’s $1.2 billion.
Europe Reassesses Its US Ties
It’s not just defense where Europe is rethinking its relationship with the U.S. Trump’s aggressive trade policies have also pushed the EU toward greater economic independence. The former president slapped tariffs on European goods in his first term and has pledged to impose 25% tariffs on EU imports soon.
Investors are betting that Europe can weather a trade war with the U.S. better now that European governments are willing to spend aggressively.
The euro surged to its highest level against the dollar since November on Wednesday. That strength lifted the Invesco CurrencyShares Euro Trust (FXE) to a 4% gain for the year.
Meanwhile, German equities have been a standout performer. The iShares MSCI Germany ETF (EWG) is up 21% in 2025, well ahead of the S&P 500’s 1% loss, as investors position for higher fiscal spending and a more independent economic trajectory for Europe.
