In the face of escalating global tensions, investors are increasingly turning to defense ETFs as a hedge against geopolitical risks, with the Middle East and Russia-Ukraine conflicts driving significant inflows into these funds. In this article, we recap the current situation and highlight a series of defense ETFs that are gaining traction.
Tensions in the Middle East are at a boiling point
Tensions in the Middle East are at a boiling point as the world anxiously awaits Iran’s response to the assassination of key Hamas and Hezbollah leaders. In anticipation of potential retaliation, the U.S. has sent additional military forces to the region, while urging for diplomatic solutions to prevent the situation from spiraling into a wider conflict.
Meanwhile, on Israel's northern border, clashes with Hezbollah persist. A recent drone attack by Hezbollah injured two Israeli soldiers and ignited a fire, adding to the simmering hostilities that have lingered for months without escalating into outright war.
Diplomatic efforts are in overdrive to stave off a regional war between Israel and Iran. However, Iran has vowed a strong response to the recent killings, heightening fears of further escalation.
Ukraine Shifts to Offense
On the Russia-Ukraine front, Ukraine turned the tables on Russia with a major cross-border incursion into Russia's Kursk region on August 6. Ukrainian forces, including hundreds of troops and heavy equipment, have seized around 600 square kilometers and more than two dozen settlements as of August 9. This bold move is intended to counter Russia’s ongoing attempts to breach Ukrainian defenses and aims to shift pressure from the Eastern front, as Russia will likely redirect forces from the occupied regions. Meanwhile, Russia continues its offensive in eastern Ukraine, facing significant challenges despite some advances.
Investor Appetite for Defense ETFs Surges Amidst Geopolitical Turmoil
Amidst the backdrop of escalating tensions in the Middle East and the prolonged Russia-Ukraine conflict, defense ETFs have emerged as a favored investment vehicle. These funds have collectively garnered over $1.6 billion in net inflows globally year-to-date, according to our data, as investors seek to hedge against geopolitical risks.
Leading the charge in Europe is VanEck Defense ETF (ETR:DFENG), which has amassed an impressive $751 million in assets under management (AUM) since its inception earlier this year. The fund is rapidly approaching the $1 billion AUM milestone, currently standing at $954 million as of August 9th, 2024.
The fund seeks to track the MarketVector Global Defense Industry Index and provides exposure to leading defense technology companies, large-scale cybersecurity firms and defense-relevant service providers.
As of end of July 2024, the ETF boasts a diversified portfolio of 28 holdings, with a heavy concentration on U.S. companies, accounting for 62% of its assets. France, Italy, South Korea, and Sweden follow as the fund’s next largest geographic exposures. The top ten holdings, including prominent names such as Palantir Technologies (NYSE:PLTR), Leidos Holdings, Booz Allen Hamilton, Thales SA, and Leonardo, collectively represent 60% of the fund’s total assets.
Investors can access the VanEck Defense UCITS ETF (DFEN) through several European exchanges, including Deutsche Börse (DFEN; EUR), the London Stock Exchange (DFNG; GBP or DFNS; USD), the SIX Swiss Exchange (DFNS; CHF), and Borsa Italiana (DFNS; EUR). The fund carries an expense ratio of 0.55%.
For European investors considering adding defense ETFs, VanEck’s DFEN, HANetf ICAV - Future of Defence UCITS ETF (LON:NATO) and the iShares Global Aerospace & Defence UCITS ETF (Acc) (EPA:DFND) are available options. You can use the Trackinsight comparison tool to help you understand the differences between the three funds.
Defense ETF for U.S. Investors
For U.S. investors interested in Defense ETFs, the Invesco Aerospace & Defense ETF (NYSE:PPA) and Global X Defense Tech ETF (NYSE:SHLD) have been among the most popular Defense ETFs this year, attracting $497 million and $368 million in net inflows, respectively.
With $3.6 billion in assets under management (AUM), PPA ranks as the world’s second-largest Defense ETF, trailing only the iShares U.S. Aerospace & Defense ETF (NYSE:ITA) with $6.42 billion AUM.
Seeking to replicate the performance of the SPADE™ Defense Index, PPA invests in companies involved in the development, manufacturing, operations, and support of U.S. defense, homeland security, and aerospace activities.
As of August 9, 2024, the fund held 55 predominantly U.S.-based companies. Its top 10 holdings, including Lockheed Martin Corp (NYSE:LMT)., RTX (NYSE:RTX) Corp., General Electric (NYSE:GE) Co., Boeing (NYSE:BA) Co., Northrop Grumman Corp (NYSE:NOC)., and General Dynamics Corp (NYSE:GD)., collectively account for 54% of the fund’s assets.
PPA trades on the NYSE Arca and has an expense ratio of 0.58%.
Other than PPA, SHLD and ITA, investors can also explore the SPDR® S&P Aerospace & Defense ETF (NYSE:XAR), the First Trust Indxx Aerospace & Defense ETF (NYSE:MISL) and the Gabelli Commercial Aerospace & Defense ETF (NYSE:GCAD) (GCAD).