Defence ETF Report | Apr 2024

Defence ETF Key Takeaways

Europe’s New Defence Industrial Strategy – European nations have announced spending increases that could add between 700 and 800 billion euros over the next seven years.  The goal is for countries to invest more, better, together, and European to make the defence industry stronger, more responsive, and innovative.  By 2030, EU countries should:

  • buy at least 40% of the defence equipment by working together
  • spend at least half of their defence procurement budget on products made in Europe
  • trade at least 35% of defence goods between EU countries instead of with other countries

Europe Faces €56bn NATO Defence Spending Hole – NATO’s European members need to find an extra €56bn a year to meet 2% targets, but the shortfall has halved in the past decade. Many EU countries with the biggest shortfalls have high levels of debt and budget deficits. The biggest shortfall by value was in Germany, which last year spent €14bn less than needed, but it plans to catch up this year. The next largest European shortfalls were €11bn in Spain, €10.8bn in Italy and €4.6bn in Belgium. The trio were among six EU countries with debt above 100 per cent of their GDP last year.

Nordic Nations Create Mini NATO – With all Nordic countries now part of NATO, the nations must manage how to reconcile and integrate national as well as regional security needs and initiatives with what the alliance requires, which could necessitate changes to existing command structures. Commanders of the Swedish, Norwegian, Finnish, and Danish air forces signed a declaration that envisioned the creation of a joint Nordic air force to protect their shared airspaces. The proposal of a combined polar air force structure has earned the title “mini-NATO”.

Rheinmetall Chief Urges Build of Defence Tech Champions – Rheinmetall chief Armin Papperger says EU states need to spur consolidation to rival U.S. groups. He says, if Europe wants closer defence collaboration, countries need to specialise in different types of military technology. “It does not make a lot of sense if we, say, pick the second- or third-best technology because one nation wants that” for nationalistic reasons.  Efforts by EU leaders to beef up defence co-operation have been stymied by the industry’s fragmentation.  European arms companies compete against each other, military budgets are controlled at national level and individual countries are eager to maintain control of strategic supply chains, plants, jobs, and technological edge.  Rheinmetall has revived its aspirations to further consolidate the region’s sprawling defence industry.

Sources available upon request. Please remember that when you invest in ETFs, your capital is at risk.

Macro Outlook

Europe has embarked upon plans to revitalize its military capabilities and become less reliant on the U.S. for military equipment and defence technology. But this defence cooperation has been thwarted by the European defence industry’s fragmentation. European companies are competing against themselves, and countries continue to reward local suppliers, often at the expense of “best of breed” solutions.

Also coming into the mix are Nordic countries, who appear ready to create a “mini-NATO” alliance to independently collaborate and scale. The next phase of European country cooperation will play out over several years, but one item of agreement is less reliance on non-European countries. This will require collaboration and cooperation to create scale in order to achieve independence.  From an investment standpoint, overweighting the European defence companies and suppliers seems most advantageous considering this paradigm shift.

Defence ETF Details

Future of Defence UCITS ETF (NATO) provides exposure to the companies generating revenue from NATO and NATO+ ally defence and cyber defence spending.

The fund tracks the EQM Future of Defence Index (NATONTR Index).

Visit the NATO fund page for more information.