Europe’s security crossroads: the shift towards strategic independence

As the geopolitical landscape continues to evolve, European defence is at a critical juncture. The continent is grappling with the possibility of reduced US military and financial support, forcing European leaders to reconsider their security strategies.

By Aneeka Gupta, Director, Macroeconomic Research, WisdomTree

With Washington signalling a shift towards direct negotiations with Russia and potentially sidelining European interests, the urgency for a more unified and self-sufficient European defence architecture has never been greater.

European-led security initiatives: a necessary step

For many European nations, the prospect of a US-brokered peace deal without Kyiv’s involvement is deeply concerning. In response to growing uncertainties, the UK and France have begun drafting plans for a European-led “reassurance force” in Ukraine. This initiative, aimed at deterring future Russian aggression, could involve up to 30,000 European troops stationed in Ukraine’s key cities, ports, and infrastructure.

However, its feasibility depends on securing US backing for intelligence and aerial protection, a commitment that remains uncertain. To support these ambitious defence commitments, Europe is also ramping up investments in defence technology and industrial production. Denmark, for example, has announced its largest military spending initiative in 50 years, accelerating weapons procurement and defence readiness.

• European defence sector: growing confidence in long-term potential
• WisdomTree launches first leveraged European Defence ETP
• Podcast: Europe is scaling up its spending on Defence

Germany’s defence shift: the election’s impact

Germany, as Europe’s largest economy, is also reassessing its defence strategy in light of recent political shifts. Following the election victory of the conservative CDU/CSU ^[1] bloc under Friedrich Merz, discussions have emerged about financing a €200 billion military spending increase. This would be twice the size of the fund approved after Russia’s invasion of Ukraine, signalling a major shift in Germany’s security priorities.

One approach under consideration is loosening borrowing restrictions or creating another special defence fund. However, this proposal faces challenges, including gaining two-thirds majority support in the Bundestag. Alternatively, leaders may attempt to push through approval before the new parliament is sworn in, potentially with the backing of the Greens.

Capturing the opportunity with European defence stocks

In response to the accelerated push for European defence autonomy, WisdomTree is providing investors with an opportunity to capitalise on the growth potential of European defence stocks via the WisdomTree Europe Defence UCITS ETF (WDEF). By investing across the European defence value chain, the WisdomTree Europe Defence UCITS ETF provides exposure to the 20 leading European defence companies. Companies with strong exposure to land-based systems (ammunition, vehicles) and air defence (missiles, drones) are particularly well-positioned to benefit from increased European military expenditures.

Figure 1: Mapping European defence leaders: companies and their core subsectors

Leading companies in European defence sector, Source: WisdomTree, company websites as of 31 January 2025.

Companies domiciled in developed and emerging European markets that derive at least 10% of their revenue from the defence industry will be eligible for inclusion in the underlying WisdomTree Europe Defence UCITS Index (Ticker: WTEUDEFN). WTEUDEFN prioritises companies with a higher exposure to the defence industry by assigning an exposure score:

• Exposure Score 3: companies with > 50% exposure to defence activities
• Exposure Score 2: companies with 25% to 50% exposure to defence activities
• Exposure Score 1: companies with 10% to 25% exposure to defence activities

Companies will then be weighted by free-float market capitalisation adjusted by the Exposure Score. In doing so, the WisdomTree Europe Defence UCITS ETF provides an exclusive focus on European defence companies, providing an undiluted exposure to the sector’s growth potential.

To provide an illustration, we can compare the weights of two leading defence companies within the WisdomTree Europe Defence UCITS Index, Rheinmetall [XETR:RHM] and Airbus [EURONEXT:AIR]. In the case of Rheinmetall, owing to its larger revenue exposure to defence activities at 70%, alongside its higher geographical exposure to Europe at 76%, it obtains a higher weight of 12.5% in the underlying Index. In comparison, Airbus, owing to its lower revenue exposure to defence activities at 20%, alongside its lower geographical exposure to Europe at 40%, its obtains a lower weighting of 7.5% in the underlying index as illustrated in Figure 2.

Figure 2: Index weightings of Rheinmetall and Airbus in the WisdomTree Europe Defence UCITS Index

Exclusive focus on European defence

The WisdomTree Europe Defence UCITS ETF has around 50% median exposure to Europe, much higher than peers (around 12-15%) ^[2]. This highlights how WDEF is built around a timely and urgent theme focused on Europe’s push for strategic autonomy in defence amid rising geopolitical tensions. With a median US revenue exposure of around 20%, WisdomTree’s strategy is notably lower than the peer range of ~50-55% ^[3]. WDEF exhibits a lower overlap with competitors as it is focused exclusively on the European defence industry, offering a purer more focussed exposure.

Figure 3: Comparison of underlying exchange-traded fund’s revenue exposure to Europe vs US

Europe’s drive for defence autonomy has significantly impacted financial markets, with defence stocks surging amid strong investor confidence in the sector’s long-term growth. The WisdomTree Europe Defence UCITS Index has outperformed its peers, highlighting its effectiveness in capturing this expanding investment opportunity.

Figure 4: Index performance calculation since live calculation

In comparison to peers, the WisdomTree Europe Defence UCITS Index offers amongst the highest forward long-term growth estimates alongside the lowest Price/Earnings to Growth ratio (PEG) ratio.

Comparison of fundamentals

Figure 5a: Estimated long-term growth

Figure 5b: Price-to-earnings (Fwd 12m)

Figure 5c: Price/earnings-to-growth (PEG)

Source: WisdomTree, FactSet, Bloomberg, as of 31 January 2025.  Holdings of the peers were sourced from Bloomberg. Fundamentals were sourced from FactSet. PEG ratios are based on forward P/E ratios and estimated long-term growth. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investments may go down in value.

On analysing the WisdomTree strategy’s long-term earnings growth forecast among peers compared to historical performance over the prior 12-months, we find the WisdomTree Europe Defence UCITS Index’s strong growth potential, alongside performance, positions it ahead of its competitors.

Figure 6: Comparison of estimated long-term earnings growth vs 12-month return

Conclusion: a defining moment for European security

The current geopolitical climate has created a defining moment for Europe’s security strategy. As the US reorients its global priorities, European nations must take decisive action to safeguard their future. This requires not only higher defence spending but also a stronger, more coordinated approach to military procurement, industrial strategy, and strategic alliances. For investors looking to capture this transformation, the WisdomTree Europe Defence UCITS ETF offers a unique, targeted exposure to Europe’s growing defence sector.

Related ETFs

[1] Christian Democratic Union/Christian Social Union.
[2] WisdomTree, FactSet, as of 31 January 2025.
[3] Ibid.