The Biggest Defense Trade of the Cycle Is the One 13Fs Cannot See

Europe is running the largest peacetime rearmament programme in its post-war history. NATO members committed at the 2025 summit to 5% of GDP on defence and security-related investment by 2035. European allies and Canada spent over $574 billion on defence in 2025, up roughly 20% in real terms year over year. Rheinmetall's Q2 2026 revenue came in at €3.37 billion, up 39% from a year earlier, with net income up 109%.

Now go looking for that trade in 13F filings. It is barely there.

What the form actually requires

A 13F covers Section 13(f) securities: exchange-traded equities, ADRs, certain convertibles and options listed on U.S. exchanges. Rheinmetall's primary listing is Xetra. Saab is Stockholm. Hensoldt and RENK are Frankfurt. BAE Systems and Thales trade in London and Paris. A U.S. manager can own all of them in size and disclose none of them, because ordinary shares bought on a foreign exchange are not reportable holdings.

So when you pull up institutional ownership in the defense sector, you are seeing a specific slice: GE Aerospace, RTX, Lockheed Martin, Boeing, Northrop, General Dynamics, L3Harris, plus the newer names like AeroVironment. Those are real businesses with real backlogs. They are also the part of the trade that a U.S. long-only fund can express without an international mandate, a custody arrangement, or a currency view.

This is the same blind spot we flagged in our piece on the small-cap rally — the disclosure regime shapes what looks crowded, and analysts routinely mistake the shape of the form for the shape of the market.

The divergence that follows

The two halves of the sector have not behaved the same way in 2026. European defense had a spectacular 2025 and then flattened: the Stoxx Europe Aerospace & Defence index is down about 1.2% year to date, with Rheinmetall's earnings miss prompting a broad re-rating question about how much of the rearmament story was already in the price. The U.S. primes, meanwhile, caught bids on Middle East escalation and a projected $1.5 trillion FY2027 U.S. defense budget, with RTX and Raytheon expanding AMRAAM production capacity in Europe through NATO feasibility studies announced in July.

If you were reading only 13Fs, you would see U.S. institutions adding to U.S. primes and conclude the smart money got long defense at the right moment. The fuller picture is that the sector's most explosive leg happened somewhere the filings don't reach, and it stopped working before the U.S. leg did.

How to use the filings anyway

None of this makes 13F data useless for the sector. It makes it a proxy that needs handling.

Check ADRs and U.S. lines first. Some European defense exposure is reportable — BAE Systems has an ADR, and several European names have OTC lines. When a manager takes those, it is often a deliberate choice to get exposure inside a mandate that discourages foreign ordinaries. A small ADR position can be a bigger signal than a large position in a U.S. prime, because it took more effort to establish.

Watch the ETF wrappers. ITA and the NATO-focused funds are reportable, and GE Aerospace alone is nearly 19% of ITA's portfolio with RTX around 16%. When a fund appears in an aerospace ETF rather than the underlying names, that is usually a top-down macro allocation rather than a company-level thesis — worth weighting differently.

Read defense as an industrials rotation, not a standalone bet. The Q2 13F data showed a broader pattern of managers taking profits in crowded technology and rotating into industrials and cyclicals. Defense adds that arrive alongside copper, uranium and capital-goods positions are part of a sector rotation. Defense adds that arrive alone are a geopolitical view. You can separate the two on our overlap tool by looking at what else moved in the same filing.

Assume the European leg is happening whether you see it or not. Global macro funds with international mandates run this exposure constantly. Their U.S.-listed defense holdings may be the hedge, the residual, or the liquid sleeve of a much larger position. Treating the visible piece as the whole position is the error.

The general lesson

Every disclosure regime has edges, and the edges are where the mispricing lives. 13F filings omit foreign ordinaries, short positions, bonds, currencies, commodities and most derivatives exposure. They arrive 45 days after quarter end. They capture what a manager held on one specific date.

Defense in 2026 is a clean illustration because the missing half is so large and so well documented elsewhere. Most of the time the missing half is invisible in both directions, which is why the discipline matters: ask what a filing structurally cannot show you before you decide what it means. Our macro consensus view exists partly to triangulate around exactly these gaps, and the investor pages are most useful when you read a manager's disclosed book as a fragment rather than a portfolio.

The rearmament cycle is real and multi-decade. The filings are just not the place you will find it first.

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Data sourced from public SEC 13F filings. Educational research only — not investment advice.