The most consequential structural shifts in defense rarely announce themselves with a single headline.

 

They accumulate quietly in procurement shortfalls, production bottlenecks and doctrine rewrites until a catalyzing event makes the gap impossible to ignore. The ongoing war with Iran has become “that event”. For investors seeking exposure to the next decade of global defense recapitalization, the Plus Korea Defense Industry Index ETF (KDEF) seeks to offer targeted exposure to a defense super cycle that the Iran conflict has only accelerated.

 

The Interceptor Gap: A Problem No One Planned For

The mathematics of modern missile defense have always been unfavorable: interceptors cost far more than the drones and ballistic missiles they are designed to neutralize. Iran has exploited this asymmetry with sustained precision. Since the conflict escalated, Iran has launched more than 3,000 drones and approximately 1,000 ballistic missiles against Israel and Gulf states. [4] Coalition forces have maintained interception rates above 90%, but at enormous cost. [5] A single Terminal High Altitude Area Defense (THAAD) interceptor runs approximately $15 million; defending Israel against just one night of Iranian salvos in April 2024 cost an estimated $1.1 billion across allied air forces. [3]

The cumulative toll has left stockpiles dangerously low. The U.S., Israel, and Gulf states are consuming interceptors faster than production lines can replace them. [6] Iran has compounded the pressure by targeting missile defense radar networks directly destroying or degrading key nodes that force defenders to expend even more interceptors per engagement. [4] The strategic logic is deliberately asymmetric: low-cost offensive saturation against high-cost defensive depletion.

The problem extends well beyond the Middle East. European NATO members, who spent years drawing down their arsenals to support Ukraine, face an urgent restocking imperative of their own. [8] Every defense ministry is now asking the same question: who can deliver the systems we need, at scale, and on time?

 

Why South Korea May Be One Structural Answer

South Korea’s answer has been decades in the making. Unlike its Western counterparts, Seoul never benefited from a post-Cold War peace dividend. North Korea’s advancing nuclear program kept defense spending at an average of 2.5% of GDP from 2000 to 2024 - a period when NATO-Europe’s commitment fell below 1.5%. [7] The result is a defense industrial base that never stopped producing and never lost the institutional knowledge that takes a generation to rebuild.

The scale of the opportunity now in front of these companies may be historic. South Korea’s five leading defense firms carried a combined order backlog of $80.7 billion as of mid-2025 - more than double the $30 billion recorded just four years earlier - with production runs secured through the end of the decade. [1,2] Financial performance has tracked accordingly. The four leading firms (Hanwha Aerospace, LIG Nex1, Hyundai Rotem, and KAI) posted combined operating profits of approximately $2.5 billion through the first nine months of 2025, already exceeding their full-year 2024 result by more than 30%. [16][17]

From missile defense to armored systems, South Korean firms are winning contracts that Western manufacturers cannot fill on comparable timelines. LIG Nex1 secured a $3.2 billion deal with Saudi Arabia for the M-SAM2 Cheongung II - one of the few battle-proven interceptor platforms available outside U.S. and European supply chains. [15] Hanwha Aerospace’s K9 howitzer and Hyundai Rotem’s K2 tank have become the go-to ground platforms for NATO members seeking speed, with Poland, Romania, Estonia, and others contracting for systems that traditional suppliers could not deliver at pace. [9] Stockholm International Peace Research Institute (SIPRI) confirms that South Korean arms export volumes more than doubled between 2010–14 and 2020–24, with European nations accounting for more than half of total export volumes in that period. [8] In 2024, Hanwha Group earned more from exports than from domestic sales for the first time in its history. [8]

The competitive advantage here runs deeper than price. Short production turnaround times, generous technology transfer terms, and manufacturing lines that never went dark are structural strengths that took decades to build and cannot be replicated quickly by competitors whose capacity eroded through years of underinvestment. [8]

 

The Macro Tailwinds Reinforcing the Thesis

South Korea’s government is reinforcing this industrial momentum with sustained fiscal commitment. The defense budget for 2026 was initially proposed at an 8.2% increase - the largest in seven years - with 66.3 trillion won ($46 billion) directed toward upgrading conventional systems and accelerating a “self-reliant defense” posture. [11] The final approved figure settled at 7.5%, still a historically high pace, with defense R&D rising 19.4% and the three-axis deterrence budget - covering preemptive strike capability, integrated missile defense, and precision retaliation - rising 21.3%. [10]

The domestic innovation ecosystem is maturing alongside the industrial base. In February 2026, the Ministry of SMEs (Small and Medium-sized Enterprises) and Startups launched an initiative to cultivate 100 defense startups by 2030, integrating AI, drone, and robotics capabilities into what has historically been a conglomerate-dominated sector. [13] A new Defense Startup Challenge program gives early-stage companies direct access to Army, Navy, and Air Force collaboration frameworks, compressing the timeline from prototype to procurement. Quarterly venture investment reached 4 trillion won in Q3 2025, with dual-use defense technologies among the leading recipients. [12]

The global backdrop amplifies every one of these tailwinds. Worldwide military spending hit a record $2.7 trillion in 2024 - a 9.4% increase and the steepest annual rise in three decades. [18] All 32 NATO allies are now meeting the 2% GDP spending floor, with a collective target of 5% by 2035. [14] South Korea’s established relationships with NATO members, combined with its neutrality on the Russia-Ukraine axis, give it commercial flexibility that American and European suppliers cannot match, positioning it to serve the European rearmament cycle and the Middle Eastern restocking cycle at the same time. [7]

 

KDEF: Targeted Exposure to a Multi-Year Supercycle

Accessing South Korea’s defense surge has historically required navigating the Korea Exchange directly: managing currency exposure, limited liquidity, and sparse English-language research. The Plus Korea Defense Industry Index ETF (KDEF) aims to remove those barriers in a single, index-based instrument, providing exposure to the full K-Defense ecosystem: the manufacturers carrying record backlogs, the systems integrators with established export pipelines, and the platform companies whose products are now in procurement queues across four continents.

What these companies share is not a response to a temporary demand spike. They are filling a structural gap created by decades of Western underinvestment - one the Iran conflict has made impossible to defer. The interceptor shortage is real, the restocking cycle is long, and the list of countries with both the industrial capacity and the geopolitical flexibility to meet that demand is short.

 

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For investors seeking to distinguish between a geopolitical headline and a multi-year defense supercycle, we believe the Plus Korea Defense Industry Index ETF (KDEF) merits a closer look.

 

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Companies mentioned in the blog may be held in KDEF. For a list of the top 10 holdings, and to learn more about the ETF, pelase click here >>. Fund holdings are subject to change.

 

NOTES

[1] KED Global. “South Korea’s Defense Order Backlog Reaches Record $73.1 Billion at End-2024.” February 17, 2025. https://www.kedglobal.com/aerospace-defense/newsView/ked202502170005.

[2] Asian Military Review. “South Korean Defence Companies Continue to Boom.” August 19, 2025. https://www.asianmilitaryreview.com/2025/08/south-korean-defence-companies-continue-to-boom-foc/.

[3] gcaptain. “Iran Missile Strikes Deplete US Interceptor Stocks.” February 28, 2026. https://gcaptain.com/iran-missile-strikes-us-interceptor-shortage/.

[4] Jewish Institute for National Security of America (JINSA). “The Eroding Shield: Air Defenses Against Iran.” Jerusalem Post. March 2026. https://www.jpost.com/middle-east/iran-news/article-891527.

[5] Fox News. “More Than 90% of Iranian Missiles Intercepted; Dangerous Imbalance Emerging.” March 2026. https://www.foxnews.com/world/more-than-90-iranian-missiles-intercepted-dangerous-imbalance-emerging.

[6] The Conversation. “Is Israel Running Low on Missile Interceptors?” March 16, 2026. https://theconversation.com/is-israel-running-low-on-missile-interceptors-how-long-can-it-withstand-irans-retaliatory-attacks-278404.

[7] Carnegie Endowment for International Peace. “Are Long-Term NATO–South Korea Defense Ties Possible?” February 27, 2026. https://carnegieendowment.org/russia-eurasia/research/2026/02/are-long-term-nato-south-korea-defense-ties-possible-transitioning-from-an-arms-exporter-to-a-trusted-defense-partner.

[8] Stockholm International Peace Research Institute (SIPRI). “Can the Growth Trend in South Korea’s Arms Industry Last?” December 10, 2025. https://www.sipri.org/commentary/topical-backgrounder/2025/can-growth-trend-south-koreas-arms-industry-last.

[9] Korea Herald. “K-Defense Climbs Global Rankings on Europe Export Boom.” December 2, 2025. https://www.koreaherald.com/article/10628008.

[10] Stars and Stripes. “South Korea Unveils Nearly $45 Billion Defense Budget, Expands 3-Axis Deterrence.” December 4, 2025. https://www.stripes.com/theaters/asia_pacific/2025-12-04/south-korea-defense-budget-increase-19977457.html.

[11] Anadolu Agency. “South Korea Unveils $524B Budget for 2026, Proposes 8.2% Rise in Defense Spending.” August 29, 2025. https://www.aa.com.tr/en/asia-pacific/south-korea-unveils-524b-budget-for-2026-proposes-82-rise-in-defense-spending/3672242.

[12] Lowy Institute. “South Korea Is on Track to Become a Defence Powerhouse.” October 23, 2025. https://www.lowyinstitute.org/the-interpreter/south-korea-track-become-defence-powerhouse.

[13] UPI. “South Korea to Nurture 100 Defense Startups by 2030.” February 23, 2026. https://www.upi.com/Top_News/World-News/2026/02/23/sme-startup-ministry-plan-to-foster-defense-sector-startups-venture-firms/3001771905784/.

[14] Mexico Business News. “South Korea’s Defense Giants to Hit US$28 Billion in 2025 Sales.” October 2, 2025. https://mexicobusiness.news/aerospace/news/south-koreas-defense-giants-hit-us28-billion-2025-sales.

[15] The News (Pakistan). “Saudis Agree $3.2 Billion Deal to Buy South Korean Missile Defence System.” 2024. https://www.thenews.com.pk/amp/1155350-saudis-agree-3-2-billion-deal-to-buy-south-korean-missile-defence-system.

[16] Korean-Machinery.com. “The Advancing Big-4 Defense Companies.” December 18, 2025. https://korean-machinery.com/2025/12/18/the-advancing-big-4-defense-companies/.

[17] Seoulz. “South Korea’s Defense Industry Big 4 in 2025.” December 3, 2025. https://www.seoulz.com/south-korea-defense-industry-big4-2025/.

[18] Stockholm International Peace Research Institute (SIPRI). "World Military Expenditure Reaches New Record High." Press release, April 28, 2025.