Defence spending is on the rise, even in countries such as Germany that are neutral. European countries are supposed to be spending 2% of GDP on defence, and even if some are falling short of this target, budgets are rising. Even before Russia invaded Ukraine, the world has been becoming a more dangerous place for some years, with more wars and conflicts, not to mention cyberattacks. According to HAN ETF, defence spending is expected to grow by 5.6% to 2027, and cybersecurity spending could grow even faster by 8.9% over the same period.
The Han ETF Future of Defence UCITS ETF (ticker: NATO) tracks an index created by woman-owned firm EQM Indexes: the EQM Future of Defence Index, which is based on companies getting at least half of their revenues from military aircraft, or other defence equipment, or providing cybersecurity to a NATO Plus member country. They need a market capitalization of at least USD 1 billion, and should be listed on an exchange in a NATO or NATO Plus country.
NATO has 32 members, of which the latest to join was Finland, with Sweden possibly the next. NATO Plus includes NATO allies, such as Australia, New Zealand, Japan, Israel and South Korea.
The ETF holdings include Europe’s largest defence contractor, BAE Systems, and Israeli defence electronics group Elbit System, as well as more diversified firms such as Thales SA of France and Rheinmetal of Germany, which serve defence and other industries. There are also quite a few US tech firms such as chipmaker Broadcom, cybersecurity groups Fortinet, Palo Alto Networks and Israeli cybersecurity specialist, Checkpoint Software, as well as Japanese IT security group Trend Micro. Investors who already have significant technology exposure might want to form a view on whether this product starts becoming too correlated with technology, and whether a more “pure play” defence strategy might be a better fit for them.
Interestingly, there is an ESG screen as well. The companies invested in, “must be in compliance with United Nation Global Compact (UNGC) principles and Organisation for Economic Cooperation (OECD) Guidelines for Multinational Enterprises”. This should not surprise those who have investigated ESG policies in some detail. It is important here to distinguish between “controversial weapons” such as landmines and cluster munitions, which often appear on ESG exclusion lists, and many other types of weapons and defence equipment, which are permissible within most ESG policies.
A total expense ratio of 0.49% is reasonable and mid range for this sort of product. Some other defence ETFs, such as Invesco Aerospace and Defence, have a slightly higher TER of 0.58% while the SPDR S&P 500 Aerospace and Defence ETF has a slightly lower TER of 0.35%.
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