ETF fund managers have been busy launching thematic ETFs targeted at the boom in defence stocks. Here at The Armchair Trader, we reckon the defence sector will – unfortunately – be one of the bigger winners in the stock stakes in 2024-25.
The defence market has seen a considerable boost following the Russian invasion of Ukraine in February 2022, but this has been compounded by fears in Asia about China’s expanding military capabilities and Israel’s ongoing actions in Gaza.
BlackRock launches defense ETF
Fund manager BlackRock became the latest Exchange Traded Fund issuer to launch a defence-focused ETF last week, the iShares Global Aerospace & Defence UCITS ETF [DFND]. This was a launch BlackRock had somewhat presciently contemplated when it first filed papers for the fund back in 2018. Now it is the third manager to the market.
Last March VanEck launched the VanEck Defence UCITS ETF [DFNS], followed in July by the Future of Defense UCITS ETF [NATO] from HanETF.
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Investors should note that the different funds follow subtly different investment strategies, based on their index criteria. BlackRock’s DFND fund follows the S&P Developed BMI Select Aerospace & Defense 35/20 Capped Index, which tracks 56 companies which have aerospace and/or defence capabilities. They are market cap-weighted and must have a minimum market cap of USD 300m. There is also a float-adjusted market cap of USD 100m.
DFNS and NATO have higher minimum market caps as well as narrower baskets in terms of the number of stocks tracked. The NATO ETF also has a requirement to track companies which derive at least 50% of their revenues from services delivered to NATO+ countries.
Both DFNS and NATO also use additional ESG screening criteria – e.g. excluding manufacturers of controversial weapons – which will tend to create a bias towards companies with a stronger digital services revenue component. BlackRock notably also excludes Chinese companies from its own ETF.
BlackRock is also lowering the bar on fees, with now the cheapest fund in this space, at at TER of 0.35%.
Europe to pivot on defence spending
The Munich Security Conference, coming precisely two years after Russia’s invasion of Ukraine, also highlights concerns about the likely next president of the US, Donald Trump, who has already demonstrated he is no friend of NATO and also keen to see European allies of the US spending more on their own defence.
Overall global defence spending rose 4% last year, according to the Stockholm Peace Research Institute. If all NATO members were to step up to the plate and spend a minimum of 2% of their GDP on defence – something Trump would like them to do – the sector would see another USD 150bn flowing in. This would be just from NATO members alone. It does not include increased spending among countries in Asia.
Record Asian defence budgets
Asian defence spending reached a record USD 510bn in 2023. China alone announced a 7.2% increase in its own defence spending last year and accounted for 43% of total spending in the Asian region in 2023. Taiwan approved its largest ever defence budget for 2024 at USD 19bn. The Australian government has forecast that its own spending will go up ninefold by the early 2030s, including an investment into nuclear submarines.
In Tokyo, the Japanese government said it would increase its own defence budget to 2% of GDP – that’s effectively doubling the total. This includes heavy investment in air and missile defence systems plus new counterstrike capabilities.
