Meet the Manager: Photonics, Human Rights Screening, US Defence

Jake Coulson:
Hello everyone, and welcome to the latest webinar from HANetf. My name is Jake Coulson, and today we’re going to be exploring three strategies that have launched on the HANetf platform this year.

We’ll begin with photonics. As AI systems are becoming more powerful, moving data efficiently between processors, memory and networking equipment is emerging as a critical bottleneck. Photonics essentially uses light to transmit and process information, potentially enabling faster, more energy-efficient connectivity.

The Defiance Photonics UCITS ETF was launched by Defiance ETFs in July and provides exposure to companies across the photonics value chain.

We had planned to be joined by Brendan Cavanaugh today, who is Chief Strategy Officer at Defiance, but unfortunately he’s unable to attend due to unforeseen circumstances. Instead, we’re very happy to be joined by HANetf’s Head of UK Sales, Robert Dickson, who will take us through that strategy in a moment.

Our second session is going to be around the JURY Global High Dividend UCITS ETF, which combines dividend-paying global equities with a human-rights screening framework. Jonathan White, Senior Advisor at The Justice Company, will be joining us to explain how that framework works and how it is incorporated into the strategy.

Finally, we’re going to turn our attention to the US defence sector. We’re going to be unpacking the proposed $1.5 trillion defence budget and what it could mean for the industry. HANetf’s Head of Research, Tom Bailey, will lead the discussion and introduce the Future of US Defence UCITS ETF.

Before I hand over to Rob for our first talk today, please do remember to submit any questions you have using the question panel on screen. We’ll aim to answer as many as possible during the webinar. Obviously, as Rob is stepping in at short notice, we’ll forward any more technical questions to Brendan and follow up via email.

With that out of the way, I’m going to hand over to Rob. Welcome, Rob.

Robert Dickson:
Thanks very much, Jake.

Good afternoon. As Jake said, I’m Robert Dickson and I head up UK Sales at HANetf. I’m taking the place of Brendan today, the strategist from Defiance, and I’m going to be looking at the Defiance Photonics UCITS ETF.

It’s probably worth saying a few words about Defiance in Brendan’s absence. They’re one of the newer partners to HANetf, but they’re a leader in thematic ETFs in the US. They have five ETFs with us on our platform in Europe, with around $200 million of AUM across that range.

Three of the ETFs they have with us are AI-related exposures, one of which is the photonics ETF that I’m going to talk about. They’ve also got a drones ETF and a Ukrainian reconstruction ETF on our platform.

We’re going to take a quick look at the case for photonics, which is very much geared into the AI growth and capex story that everyone is focused on at the moment.

As we know, this is a multi-trillion-dollar capex opportunity, with Goldman Sachs estimating that $7.6 trillion of capital will be invested over the next five years across computing, data centres and the power demands that this growth will put on industries.

Let’s look at where photonics fits into the AI value chain. Optical interconnects, which is the photonics area, sit towards the latter stages of the AI infrastructure buildout, but they play a very important role because they help move data quickly from A to B and enable AI models and applications to work.

Interconnection is key, and increasingly that means optical interconnection — photonics — where light is used to move the data.

If we look at why light is so relevant, we need to look at the buildout of these massive data centres with huge clusters of AI accelerators. Moving the data between them is a significant task because more bandwidth is required, more power is required and the distances involved can increase.

The distance is important not only within these clusters but also between data centres. Photonics can provide a more economically viable way of moving data and facilitating the requirements of the AI buildout.

Vast amounts of power, excessive heat generation and signal degradation, which gets worse over distance, are increasingly problematic. Photonics addresses some of this by using light instead of electricity.

It can help with the power issues facing data centres and cut the cost of transmission per bit. Silicon photonics interconnection, according to the figures shown here, requires around 3.5 times less energy, with the associated cost benefits. It can therefore be a fraction of the cost of some legacy interconnection technologies.

The point of the next slide is that NVIDIA and Jensen Huang are making a significant statement regarding photonics and its importance.

NVIDIA is putting capital to work in the supply chain, enabling suppliers of important photonics equipment to expand and deliver the capacity that has been lacking and has contributed to some of the bottlenecks Jake mentioned earlier.

NVIDIA has committed around $6.5 billion across a number of players, including companies such as Lumentum, Coherent, Marvell and Corning, while also securing purchasing and partnership agreements into the future.

So this is not simply a short-term phenomenon. It is integral to their growth and the scaling required to make AI infrastructure work. It is a strong signal that optical components are strategically important for the future of AI systems and the large clusters of GPUs we looked at earlier.

The infrastructure is important, and NVIDIA is endorsing that with its own capital.

If we then look at the demand picture outside AI, which is obviously a huge medium-term opportunity, there is also increasing demand from a number of other technologies.

Some of that is simply the upgrading of existing technologies. Telecommunications has used photonics for quite a long time, for example, but the requirement continues to increase as transmission speeds rise and more data needs to move across networks.

There are also applications in healthcare, quantum computing and military technology. Optical networking, LiDAR and laser technologies are becoming increasingly important.

Looking at the investment universe itself, the strategy gives exposure across the photonics ecosystem. That includes lasers and light generation, chips, transceivers, fibre and the networking companies that put everything together.

It is designed as a relatively pure-play index. Companies generally need more than 50% of their revenue to come from relevant photonics activities to qualify as pure-play businesses, and the index aims to have around 85% exposure to these pure-play companies.

There are minimum market-cap and liquidity criteria, and there are currently around 25 companies in the index.

Across those sub-themes, there are some familiar names but also a lot of companies that many people will be less familiar with. Most people may have heard of companies such as Lumentum, Corning or Ciena, but there are a range of other companies from developed economies, and companies from other countries can enter the index if they meet the criteria.

As ever, it’s also worth mentioning the risks. Photonics and optical technology are areas experiencing rapid technological change. At the moment, that is helping to create demand, but technology can also change very quickly.

There are also risks around semiconductor cycles, pricing, supply, potential overcapacity, government regulation and geopolitics. These are specialist technology companies, and that creates its own set of risks.

Jake Coulson:
Thanks very much, Rob.

One question that comes to mind is around the increasing political and regulatory opposition to data centres. We’ve seen questions over who pays for the additional infrastructure and electricity demand associated with them.

Does that potentially weaken the investment case for photonics if we start to see greater resistance to data-centre development?

Robert Dickson:
I don’t think it fundamentally changes the thesis.

A lot of the debate around data centres is about who actually pays for the additional infrastructure required, particularly the electricity grid.

That doesn’t necessarily mean the underlying demand for AI computing or data transmission disappears.

If anything, the pressure around energy consumption increases the importance of finding more efficient ways of moving data.

Photonics potentially provides a more economical and energy-efficient method of doing that compared with incumbent copper-based technologies.

As data centres continue to be built and existing ones are upgraded, we would expect photonics to become an increasingly important part of that infrastructure.

Jake Coulson:
Great. Thank you very much, Rob.

We’ll move on now to our second topic.

The strategy we’re looking at here has two principal objectives. The first is investing in dividend-paying companies across developed markets, and the second is excluding businesses that do not meet a clearly defined set of human-rights standards.

Jonathan and I are going to divide and conquer here. I’m going to talk through the dividend side and the investment case, and Jonathan will then come in and talk about the human-rights screening in a bit more detail.

Essentially, the strategy starts with large- and mid-sized companies and looks for companies that offer both an attractive dividend and evidence that those dividends are sustainable.

Companies must have paid a dividend over the previous 12 months and demonstrated an upward dividend trend over a five-year period.

Importantly, it isn’t simply about selecting whichever companies have the highest dividend yield.

An unusually high dividend yield can sometimes be a sign that a company is facing financial difficulties or that the market expects its dividend to be cut.

The methodology therefore also considers factors such as earnings stability, company quality and the proportion of earnings being paid out as dividends.

There are then diversification constraints designed to prevent the strategy from relying too heavily on a small number of companies or sectors.

The aim is to achieve an enhanced level of income without sacrificing company quality or creating excessive concentration.

Of course, the other important element is the human-rights screen, which Jonathan is going to discuss.

Before handing over, I wanted to provide some context around how the complete methodology — including both the dividend criteria and the human-rights exclusions — has behaved historically.

The backtested figures shown cover the five years from May 2020 to November 2025. Over that period, the index generated cumulative returns that were broadly competitive with both a wider developed-market benchmark and a sustainable high-dividend comparator.

It’s important to stress that these are backtested figures rather than live performance and are not indicative of future returns.

To explain more about the human-rights assessment, how it works, the evidence that is considered and how decisions are reached, I’m going to hand over to Jonathan.

Jonathan, over to you.

Jonathan White:
Thank you. Thanks very much, Jake, and thanks everybody for joining us this afternoon.

I’m here to talk about the human-rights aspects of the strategy and our involvement with The Justice Company.

Alongside being a Senior Advisor to The Justice Company, I also work with Ethical Screening, which has been operating for almost 30 years.

Historically, our work has involved ethical and exclusionary screening. Over the years, that has developed to incorporate ESG metrics, Sustainable Development Goal metrics and further developments alongside our ethical criteria.

We work with a broad range of clients and institutions and deliver screening across areas such as animal welfare and human rights.

That background is what brought the family involved with this project to us. Essentially, they were looking for a product that did not already exist in the market.

They wanted a strategy that could provide exposure to high-dividend companies while also incorporating an ethics-based screen designed to rule out instances of the gravest human-rights violations.

When we talk about those gravest violations, we’re talking about areas such as genocide, modern-day apartheid, ethnic cleansing and other serious human-rights abuses.

It is important to note that this is a location-agnostic screen. We are looking at those types of violations regardless of where they happen.

If something is potentially happening in Germany, for example, that does not make it any less serious than if it is happening somewhere else in the world.

When I talk about the methodology, hopefully it will become clear how we reach the conclusions we reach in relation to the companies being assessed.

The family wanted a particular product built around these two pillars, and in doing so we created what is essentially a professional, rules-based framework.

A key distinction is that this is not simply another aggregate ESG score.

With a traditional ESG score, a company might perform badly on one particular issue but compensate for it by performing strongly somewhere else.

That is not how this framework works.

If a company is considered to be involved in one of the gravest human-rights violations covered by the framework, good performance on another environmental, social or governance issue does not cancel that out.

It is a much more black-and-white approach to those particular human-rights issues.

The Justice Company was established as an independent initiative to create this transparent, rules-based methodology.

The methodology draws on internationally recognised standards and principles, including the Geneva Conventions, the UN Guiding Principles on Business and Human Rights and OECD guidelines.

The aim is to provide an institutional-quality process for identifying companies that could potentially be connected with severe human-rights risks.

The research and auditing process is deliberately rigorous.

One example I often use is that our team once spent around two hours discussing elevators and the context in which a company’s elevator services were being used.

On the face of it, that may seem like quite a banal item to spend so much time discussing.

But I think it demonstrates just how fine a toothcomb we take to both the methodology and the research process, as well as the auditing and quality control over what ultimately ends up in the index.

The fact that we can go back and forth to that extent on something that might initially appear minor demonstrates how vigorous the overall process is.

There is a detailed methodology document available for anyone who wants to go further into how those decisions are made, and we’re also very happy to answer questions that stem from the methodology.

I think that probably sums up where we are with The Justice Company and the methodology at the moment. Thank you very much for listening.

Jake Coulson:
Thank you very much for that, Jonathan.

Obviously, people can read the full methodology at their leisure, but I wanted to press you with a question or two first.

You spoke about how you assess these companies and the amount of due diligence involved.

How do you distinguish between a company that is directly involved in a harmful activity and one that has a more indirect connection, perhaps through its supply chain or another form of indirect exposure?

Jonathan White:
That’s a great question.

Given that we can spend two hours looking at elevators, we also take a very rigorous approach to this question.

From a core-principles standpoint, we ask whether the service, product or activity of a company is enabling the activities that we do not want exposure to.

That could include, for example, enabling genocide, modern-day apartheid or ethnic cleansing.

We therefore look at whether particular products or services enable that behaviour, and we do take the analysis into the supply chain.

One example involved supply-chain issues around logistics facilities, robotics and other infrastructure being used in areas that were considered to be occupied.

We took a strong approach to analysing how the supply chain interacted with the underlying end activity and to what degree the involvement was rooted in the supplier’s own actions.

One important aspect of our process is giving companies the right to reply.

Where we reach out and don’t receive an affirmative or sufficiently clear response, we will naturally err on the side of caution, because the last thing we want to do is approve a company that should not be approved.

Jake Coulson:
You also spoke about how, once companies enter the index, you continue to monitor them carefully because companies can change.

They might initially pass the screen but later become involved in something that means they need to be excluded.

Does that also work in the opposite direction? Are there companies that might previously have been excluded but can later become eligible if they demonstrate that they are no longer involved in those activities?

Jonathan White:
Yes, exactly right. The inverse can happen.

Even during the backtesting portion of our research, we came across a number of companies that would have been excluded in 2020 or 2021 but would then have been approved in 2023 or 2024.

I think that is a very important part of the research process.

We are naturally more than happy to reassess a company that has previously been excluded if circumstances have changed and it can subsequently be approved.

The research draws on a wide range of sources.

That includes location and contextual indicators such as Freedom House, recognised human-rights organisations such as Amnesty International and other reputable NGOs.

So yes, we actively monitor companies whether they are currently in the index or have previously been excluded from it.

Jake Coulson:
Thank you very much, Jonathan.

As you mentioned, there are lots of materials available online, so anyone viewing can go and check those out.

You can also email us if you have a question for Jonathan and we can come back to you with more detail.

With that, we’re going to move on to our final talk of the day, which is from Tom Bailey, our Head of Research at HANetf, who’s going to be taking a closer look at US defence.

Over to you, Tom.

Tom Bailey:
Thank you, Jake.

Quite a transition from ethical screening to defence, but obviously we’ll leave it to viewers to decide how they feel about defence.

What we do know is that there has been growing interest in the defence theme. Last year, European defence was one of the dominant themes, but this year our focus has also moved towards the US.

Last year, the US actually ended up reducing military expenditure compared with the previous year. Now, however, we’ve seen a very large defence budget being put forward, while the US is also having to confront some significant challenges around maintaining and expanding its defence capabilities.

The idea is that we’re potentially seeing US defence spending increases comparable in some respects to what Europe has experienced over the past couple of years.

I’ll explain the investment case for the US and then explain how the strategy itself is structured.

The first point is that, despite questions around the relative decline of US military power, increased spending elsewhere and attempts at what has been described as burden shifting — encouraging NATO members, South Korea and Japan to spend more on their own defence — the US remains the largest defence market in the world.

There have obviously been attempts, particularly in Europe and among some East Asian allies, to reduce reliance on the US.

However, the US defence sector still retains certain core capabilities that allies require, including areas such as missile interceptors and other advanced military equipment.

So while a lot of the defence discussion over the past few years has focused on countries reducing their reliance on the US and developing their own defence industries, the US is still the largest player and is likely to remain so for the foreseeable future.

At the same time, we now have this very significant budget request.

For the 2027 financial year, the US has proposed a defence budget of approximately $1.5 trillion.

There are a number of different components within that figure and ongoing debates around appropriations, but what is particularly interesting is where the priorities lie.

A large amount is focused on the defence industrial base and scaling up US defence production.

That has become a major question: not simply whether there is demand for more defence equipment, but whether the industry actually has enough production capacity to supply it.

There is also significant focus on missile and air-defence systems and on building up stockpiles.

So the new budget is not simply about buying more of the existing types of equipment. It is also about increasing production capacity, rebuilding depleted inventories and investing in newer technologies.

Drones are one important example.

The role of drones has changed dramatically over this decade. Nagorno-Karabakh in 2020 and, much more significantly, the ongoing war in Ukraine have demonstrated how central drones can be to modern conflict.

Ukraine has shown that relatively inexpensive unmanned systems can be produced and deployed at enormous scale.

That creates a question for the US around its own ability to produce drones at scale and build a domestic supply chain capable of supporting that type of warfare.

There have also been reports that the US government has considered providing direct support to domestic drone companies in order to increase capacity.

There isn’t necessarily a concrete policy in place yet, but it demonstrates the direction of travel and the increased focus on strengthening domestic production.

Another major issue is stockpiles.

Various weapons systems, particularly sophisticated missile interceptors, can take a long time to manufacture.

That means replacing equipment at the rate at which it might be used in a major conflict can be challenging.

One solution is the use of longer-term procurement agreements.

If a manufacturer has greater visibility over demand through multi-year contracts, it has more confidence to invest in expanding manufacturing capacity.

So we’re seeing an increased focus not only on the amount being spent, but also on the structure of contracts and giving companies the visibility they need to scale production.

There is then a wider technology element.

Modern defence is no longer simply about the traditional large defence primes.

Increasingly, you have companies involved in cybersecurity, advanced communications, autonomous systems, drones, software, command-and-control systems and a range of other technologies.

Some of these companies would not traditionally have been considered defence companies, but they increasingly generate meaningful revenue from defence and national-security contracts.

The methodology therefore aims to capture both established defence businesses and companies involved in these emerging areas.

There are revenue requirements to make sure companies have meaningful exposure to relevant defence activities, and there are also requirements around business conducted with the US and NATO member states.

Individual constituents are capped so that the strategy is not simply dominated by the largest names such as Lockheed Martin or RTX.

The idea is to achieve exposure to traditional defence companies while also capturing some of the newer businesses involved in defence technology.

One challenge is that a number of the fastest-growing companies in this space are still private.

That means they can’t currently be included in a UCITS ETF. However, if some of those businesses eventually come to the public market and meet the relevant eligibility requirements, they could potentially become part of the investable universe.

Jake Coulson:
Thank you very much for that, Tom, and thank you as well to Rob and Jonathan for joining us today.