While ongoing conflict around the world continues to boost the gold price, it has also benefited defence stocks. Cautious investors have been pouring money into the sector as governments in both Europe and Asia ramp up their defence budgets.
In April the UK announced it would be increasing its own defence spending to 2.5% of GDP. Overall defence expenditure of the European NATO countries topped $347bn in 2023 and is projected to exceed $380bn in 2024. NATO reported that since 2014 when Russia occupied the Crimea, NATO countries in Europe have added more than $600bn to defence, with a real increase of 11% in spending across the European allies and Canada.
VanEck Defense ETF sees fund volume double
ETF fund manager VanEck has reported that its Defense UCITS ETF has now doubled its fund volume to USD $1 billion in just under four months, after reaching the USD $500 million mark in April 2024. The ETF, which was launched in March 2023, has a Total Expense Ratio (TER) of only 0.55%.
“Since Russia’s invasion of Ukraine in 2022, European countries have realised that they need to strengthen their armed forces and revive the defence industry to protect the continent’s democracies,” said Martijn Rozemuller, CEO of VanEck Europe. “This shift in sentiment has intensified in 2024, as defence spending by European NATO allies is expected to increase in order to meet the agreed 2% target.”
While the armaments industry has historically been a sensitive subject, public perception and understanding of its relevance has evolved significantly, particularly since the outbreak of the conflict in Ukraine.
“Substantial opportunities” in defence sector
“Many investors now perceive substantial opportunities in shares of companies operating in the security and defence sector,” said Rozemuller. “This shift of sentiment has driven a notable surge in defence stock prices, as evidenced by the performance of the VanEck Defense UCITS ETF since its launch in March 2023.”
Since its launch in spring 2023, the VanEck Defense UCITS ETF was the first pure-play ETF available in Europe, facilitating investor access to this sector. The fund aims to invest in companies that generate the majority of sales within the defence sector across: defence equipment, aerospace technology, communications systems and services, satellite technology, unmanned aerial vehicles, security software, IT hardware and services, cybersecurity software, training and simulation solutions, digital forensics, tracking devices, and e-authentication or biometric identification applications.
The ETF tracks the MarketVector Global Defence Industry Index, specifically excluding companies involved in the sale of controversial weapons systems or those with a proven record of non-compliance with established standards.
In terms of sustainability disclosure, the ETF falls under Article 6 of the Sustainable Finance Disclosure Regulation (SFDR).
Massive increase in European military budgets
Military spending in both central and western Europe is now at a higher rate than during the Cold War, according to the Stockholm International Peace Research Institute. All but three NATO countries – Greece, Italy and Romania – have increased defence spending in the last 12 months. The biggest three spenders are the UK, Germany and France, all of whom spent more than $60bn in 2023.
European defence spending has been rising every year since Russia invaded the Crimea in 2014. The subsequent attack on Ukraine in 2022 has served to augment defence allocations. Germany has hiked its defence spending by an enormous 48% since 2014.
