Future of Defence Report | June 2024

Defence and Aerospace ETF Key Takeaways

NATO has a small window to boost defences – Norway’s Chief of Defence shared his view that NATO has only a 2 to 3-year window to prepare before Russia has rebuilt its ability to carry out a conventional attack against NATO members. This is a shorter timeframe than some other western officials have estimated. “At one point someone said it’ll take 10 years, but I think we’re back to less than 10 years because of the industrial base that is now running in Russia,” General Eirik Kristoffersen, 55, said in an interview in Oslo. He estimates that NATO has a 2 to 3-year window to rebuild forces and stocks while at the same time supporting Ukraine. The Norway parliament is due to approve a plan to almost double defence spending over the next 12 years with a focus on naval and air defence capabilities. Norway’s plan is in keeping with NATO’s increase in spending goals above the previous 2% of GDP spending target, with 2.7% expected to be achieved by 2030.

NATO to unveil Ukraine security package as bridge to membership –NATO plans to offer Ukraine a security package when the alliance convenes its annual summit this summer in Washington, but it is expected to stop short of accepting the nation’s long-standing request for membership amid Russia’s invasion. In addition to unveiling the package in July, an estimated 32 countries are finalizing a series of bilateral agreements to support Ukraine ahead of the summit, with 13 finalized so far. Ukrainian President Volodymyr Zelenskyy had asked for fast-tracked accession into the alliance shortly after Russia’s full-scale invasion in 2022. Instead, NATO has offered Ukraine a multiyear assistance package meant to bolster Ukraine’s defences and help it transition away from Soviet-era equipment.

Six NATO countries announce “drone wall” border defence plan – Lithuania, Latvia, Estonia, Poland, Finland, and Norway are joining forces to build a “drone wall” to protect their borders. Details such as funding, timeline and technical aspects of the project were not provided, but the Lithuania’s interior minister said EU funds could play a role and that each country had to do its “homework.”

NATO to expand defence tech and intelligence sharing with Ukraine – NATO is planning to expand cooperation with Ukraine on defence technology and share more intelligence about Russia’s electronic warfare capabilities. The conflict has pushed NATO to devote more resources to cybersecurity deterrence and tracking of Russia’s military technology. According to NATO and Ukrainian officials, Russia’s tech strategy relies heavily on buying drones from Iran and components from China. Russia’s military has circumvented sanctions to buy Western tech through third-party vendors. It has also developed new technologies, including ones that can evade acoustic sensors set up to locate drones. GPS jamming is an increasing issue that is being addressed by Ukrainian startups developing drones that can map terrain without GPS, using only sensors and cameras. Next generation devices will not rely on GPS. Both Russia and Ukraine are working to locate drones based on sound. Drone companies are developing drone motors that are entirely silent, creating quite literally a “silent arms race.”

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

Macro Outlook

According to the Stockholm International Peace Research Institute (SIPRI), an estimated $2.4 trillion was spent on military expenditures across the world in 2023, marking a new record high, with a 6.8% increase over the previous year. 2023 marked the ninth successive year during which global military spending had risen, and the steepest rise in expenditure since 2009.

The surge in defence spending has boosted defence stocks, especially in European defence companies who are benefiting from efforts to rebuild, restock, and modernize their defence forces.

Among NATO’s top performing holdings year-to-date include European defence contractors like Rheinmetall AG, Safran SA, BAE Systems PLC, Thales SA, Leonardo SPA, and SAAB AB who are all benefiting from these spending trends.

Defence and Aerospace 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.

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