Understanding Defence ETFs - A Gateway to India’s Defence Theme
The Indian defence sector has undergone a historic transformation. The domestic defence production reached a record ₹1,27,434 crore (approx. ₹1.27 lakh crore) in FY 2023–24, reflecting a 174% surge since 2014–15[1]. For investors, Defence ETFs (Exchange Traded Funds) offer a transparent and structured way to participate in this theme without the need to select individual stocks.
What is a Defence ETF?
A Defence ETF is a thematic fund that primarily invests in companies involved in manufacturing equipment, systems, and services for the defence and aerospace sectors. These funds track the Nifty India Defence Index[2], which captures the performance of a portfolio broadly representing the nation's defence theme.
How Stocks are Selected: The Index Methodology
The Nifty India Defence Index follows a selection process as highlighted below:
- Universe: Stocks are filtered from the Nifty Total Market Index.
- Eligibility: To qualify, a stock must either form part of eligible basic industries or obtain at least 10% of its revenues from the defence industry.
- Ranking & Capping: Eligible stocks are chosen based on their 6-month average free-float market capitalization, with individual stock weights capped at 20% each.
Past Performance and Volatility
The Past Performance and volatility for the Nifty India Defence Index is presented below. However, higher growth often comes with increased volatility, as indicated by its Standard Deviation.
Data as per Nifty India Defence Index Factsheet (Base Date: April 02, 2018).
Frequently Asked Questions (FAQs)
1. Which stocks are eligible to be part of the Defence ETF?
The weight of the stocks are based on their free-float market capitalization and are capped at 20% each. These stocks are primarily drawn from the Capital Goods (75.22%), Automobile and Auto Components (14.07%), and Chemicals (10.71%) sectors.
2. How often is the Nifty India Defence Index rebalanced?
The index undergoes rebalancing semi-annually. During this process, the list of constituents and their respective weights are reviewed to ensure they continue to meet the eligibility criteria, such as the 10% revenue threshold from defence operations
3. How are the Defence ETFs taxed?
Defence ETFs are taxed as Equity ETFs. Short-term gains (<12 months) are taxed at 20%, and long-term gains (>12 months) are taxed at 12.5% without indexation.
4. Which "Basic Industries" are eligible for the Defence Index?
According to the NSE index methodology, companies belonging to basic industries such as Aerospace & Defence, Explosives and Ship Building & Allied Services are eligible for selection.
Points to Consider
The sector carries concentration risk. Performance may be dependent on government defence budgets and policy shifts among other factors. Hence, investors should align their exposure with their risk appetite and consult a financial advisor before investing.
Disclaimer - Please note that this article or document has been prepared on the basis of internal data/ publicly available information and other sources believed to be reliable. The information contained in this article or document is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party in any manner. The article does not warrant the completeness or accuracy of the information and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article or document.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully
Published on Jan 9th, 2026
Source
[1]: India Defence Production
[2]: Nifty India Defence Index - Dec 31st 2025