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The primary change traded fund to focus solely on European defence firms has come to market, coinciding with a frenzied reappraisal of Europe’s reliance on the US after it lower navy support to Ukraine.
The WisdomTree Europe Defence Ucits ETF (WDEF) listed right this moment on Deutsche Börse Xetra and Borsa Italiana and can begin buying and selling on the London Inventory Alternate on Wednesday.
It follows a proprietary index that WisdomTree launched in October 2024 with the intention of making the ETF.
“Once we determined to launch an ETF for this theme it was not very clear whether or not [President Donald] Trump would win, however we had been very clear on the under-investment hole of Europe vs the US,” mentioned Aneeka Gupta, director of macroeconomic analysis for Europe at WisdomTree.
The ETF invests in 20 European firms that manufacture civil defence tools, defence electronics and house defence tools and seeks to exclude firms concerned in controversial weapons banned by worldwide legislation, equivalent to cluster munitions and anti-personnel mines.
Its greatest holding is Rheinmetall, Germany’s largest defence firm, which at present accounts for greater than 18 per cent of the index. Leonardo, the Italian defence firm, is extra 15 per cent, Saab and BAE Methods are practically 10 per cent every and Thales is round 9 per cent.
A small variety of firms and hefty publicity to these at high of the index are often warning flags for investing in any narrow-themed fund.
However Gupta identified the big publicity to Rheinmetall was because of its share value nearly doubling for the reason that begin of the yr. The index will rebalance twice a yr on the third Friday of March and September and its methodology dictates that the utmost weight, even for trade powerhouses equivalent to Rheinmetall, is capped at 12.5 per cent, which ensures compliance with Ucits diversification guidelines.
She conceded that the white-hot curiosity in European defence firms had led some potential shoppers to precise issues that the theme could be overpriced and that now could be an costly time to purchase.
However she argued that the EU’s European Defence Industrial Technique proposed spending no less than 50 per cent of procurement budgets throughout the bloc by 2030 and 60 per cent by 2035, which meant there would possibly nonetheless be appreciable upside for European firms.
Present European-domiciled defence ETFs supply international publicity and cash has flooded into the 2 largest, the $3.3bn VanEck Protection Ucits ETF (DFNS) and HANetf’s $1.6bn Way forward for Defence ETF (NATO) for the reason that begin of the yr. Each DFNS and NATO have an publicity of greater than 50 per cent to US defence firms.
“There are many years the place nothing occurs and weeks the place many years occur. This, it could appear, applies to the previous few weeks. European leaders are scrambling to reorganise the whole safety structure of the continent,” mentioned Hector McNeil, co-founder of HANetf.
HANetf mentioned the NATO ETF had already attracted greater than $700mn of internet new belongings for the reason that begin of the yr.
“The present local weather will possible push European leaders to cut back reliance on the US as a lot as attainable,” McNeil mentioned, including that NATO provided a diversified solution to entry publicity to European defence firms.
Martijn Rozemuller, chief govt of VanEck EU, advised the FT last week that the restricted variety of defence-focused firms in Europe would make it exhausting to create a purely European defence ETF because of Ucits guidelines on diversification.
The WisdomTree index methodology permits funding in firms with an publicity as little as 10 per cent to defence actions.
