European white-label ETF issuer HANetf is set to introduce a new thematic equity fund targeting companies providing defence-related products and services to NATO countries and its allies.
European NATO members have ramped up their defence spending in the wake of Russia’s invasion of Ukraine.
The Future of Defence UCITS ETF is expected to debut on 4 July, listing on London Stock Exchange in US dollars (Ticker: NATO LN) and pound sterling (NATP LN) as well as on Deustche Börse Xetra in euros (ASWC GY).
The fund will also roll out on Borsa Italiana in euros (NATO IM) at a later date.
HANetf notes that the ETF’s strategy is timely as global military spending is on the rise, reaching an all-time high of $2.2 trillion in 2022.
European NATO members are a key driver of this growth as these countries have been shaken out of their post-Cold War spending slump following Russia’s invasion of Ukraine. Some of these countries are now predicted to significantly exceed NATO’s recommended military spending target of 2% of GDP – Poland, for example, is aiming to spend 4% of its GDP on defence, a move that could potentially see it build the largest land army in Europe.
Beyond the conflict in Europe, tensions in Asia-Pacific, not least over China, Taiwan, and the South China Sea, continue to increase, while elsewhere, the Middle East and the Sahel region of Africa remain highly unstable.
Accordingly, in a recent survey of wealth managers conducted by HANetf, more than three-quarters (78%) reported that geopolitics had become more important when engaging in fund selection over the past year.
Of course, in the 21st century, national security is not just about physical borders and military strength as cyberspace has become an increasingly important battleground. HANetf has tailored its newest ETF to reflect this reality, designing a strategy that brings these two critical components of modern defence together.
Hector McNeil, Founder and co-CEO of HANetf, commented: “Whether it’s the ongoing war in Ukraine or the growing risk of conflict over Taiwan or the South China Sea, it is clear the world is becoming a riskier place. The post-Cold War world is over – and governments around the world are recognising this.
“But it is not just spending on tanks and missiles. Cyberspace is now a new domain of warfare, which it has clearly been since both the 2014 and 2022 Russian invasions of Ukraine, which saw the latter relentlessly targeted by state-sponsored cyber-attacks.
“That is why we are launching the Future of Defence UCITS ETF which will provide investors with a means of accessing the companies that will be poised to benefit from increased spending by NATO and NATO+ allies on both military hardware and cyber defence. Defence-related funds exist but they tend to be industrials heavy and not focused on NATO and its allies which, by definition, is a defensive alliance and not an aggressor. NATO is a unique ETF on this basis.”
Methodology
The ETF will track the EQM Future of Defence Index which selects its constituents from a universe of stocks domiciled and listed in NATO countries as well as select allies including Argentina, Australia, Bahrain, Brazil, Colombia, Egypt, Israel, Japan, Jordan, Kuwait, Morocco, New Zealand, Pakistan, the Philippines, Qatar, South Korea, Taiwan, Thailand, and Tunisia.
Companies must have market capitalizations above $1 billion and average daily trading volumes greater than $1 million to be eligible for inclusion. Violators of UN Global Compact Principles will be removed from the selection pool.
The index screens the initial universe for companies deriving at least 50% of their revenue from the manufacture and development of military aircraft, naval ships, tanks, weapon systems and missiles, munitions, mission systems, and defence technology applications. Firms that derive more than half their revenue from cyber security contracting with a NATO+ member nation will also be included.
Constituents are weighted by float-adjusted market capitalization subject to a cap and floor of 5% and 0.2%, respectively. The maximum exposure by country is 60%, enabling non-US, NATO+ headquartered companies to play a more meaningful role in the strategy.
As of the end of March, US-listed stocks accounted for 60% of the index’s total weight with the next-largest country exposures being France (10%), the UK (9%), Israel (9%), and Italy (5%).
The sector allocation was approximately equally split between stocks from the information technology (54%) and industrials (46%) sectors.
Notable positions included Palo Alto Networks (6.3%), BAE Systems (5.3%), Thales SA (5.2%), Broadcom (5.0%), and Cisco Systems (4.9%).
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