New European defence ETF aims for rival’s market with NATO ticker

Three months after VanEck’s successful launch of the first European-listed defence exchange traded fund, HANetf has launched a lower-cost challenger under a catchy ticker: NATO.

The Future of Defence Ucits ETF, which debuted on July 4 on the London stock exchange, and Deutsche Börse’s Xetra market, seeks to provide exposure to companies generating revenues from spending on defence and cyber security by Nato members and their non-Nato allies.

The EQM Future of Defence index that it tracks has a 54 per cent exposure to information technology and 46 per cent to industrials.

This weighting sets it apart from its rival VanEck Defense Ucits ETF (DFNS) which has just 30 constituents, against NATO’s 48, with a weighting of just less than 15 per cent to information technology.

“I think the addition of cyber security is probably the most interesting element here. It gives the defensive theme a growthy twist — which is not necessarily a bad thing,” said Kenneth Lamont, senior fund analyst for passive strategies at Morningstar.

NATO also undercuts DFNS with a total expense ratio of 49 basis points, versus 55bp for VanEck’s ETF.

Martijn Rozemuller, chief executive of VanEck Europe, said DFNS had already become one of VanEck’s top traded ETFs on Xetra, where it goes under the ticker DFEN.

“We launched with $1mn and as of now have accumulated around $35mn,” said Rozemuller. “We noticed that the inflows have been accumulating gradually, rather than in spikes, suggesting that there is structural demand for the theme in Europe.”

In other words, steady growth in assets under management suggests that sensitivity around the idea of investing in defence in Europe might be subsiding.

In terms of the methodology relied on by NATO, Rozemuller said he did not see any significant difference in the list of eligible countries for inclusion in the index.

Lamont agreed: “It should be pointed out that the rival DFNS isn’t exactly investing in Iranian drone manufacturers or Chinese biowarfare labs, it currently has less than 15 per cent exposure to non-Nato domiciled countries.”

He added that these non-Nato countries included Sweden (which may soon become a member) as well as South Korea, Singapore and Israel, which would all be considered a “friend rather than foe” of the Nato bloc and which could all be expected to benefit from increased western military spending.

It is this forecast increase in spending that provides the rationale for the launch of both funds.

Global defence spending rose by 4 per cent to reach a record $2.24tn last year, according to the Stockholm International Peace Research Institute. This year, it is set to continue rising, even as higher interest rates increase governments’ borrowing costs.

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Financial Times research shows that only seven of Nato’s 31 members met the alliance’s self-imposed defence spending target of 2 per cent of gross domestic product last year. If they all did, total outlays would rise by more than $150bn a year.

“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,” said Hector McNeil, founder and co-chief executive of HANetf.

McNeil also stressed the advantage of having been able to secure such a memorable ticker.

But Lamont countered: “This fund’s strengths, such as they are, lay in the slightly lower fee and broader interpretation of security, but the Nato association is more of a distraction than anything else.”