“After a long period of the declining frequency of war, we are likely to be fighting more wars in the coming years as the post-Second World War consensus breaks down”, writes Dr Mike Martin, a former British Army officer.
Currently we are amidst the largest land war in Europe in almost 80 years, with four of the five main nuclear powers involved to varying degrees. Meanwhile, tension is rising over the South China Sea and Taiwan, and the Middle East and Sahel region of Africa remain highly volatile. As a result, global military spending is on the rise. In 2022, a record $2.2 trillion was spent on defence. [1]
It is within this context that HANetf decided to launch the Future of Defence UCITS ETF (NATO). The objective of the fund is to offer investors an opportunity to invest in global companies that generate significant revenues from defence spending by NATO and NATO+ countries.
The crucial distinguishing characteristic of the defence ETF is its focus only on companies providing equipment or services to NATO or NATO+ members. This is to ensure exposure to only responsible geopolitical actors, reflecting NATO's role as a defensive alliance with an aim to safeguard freedom and democracy.
In light of recent geopolitical developments, NATO members are projected to significantly ramp up their military spending.
The post-Cold War spending slump experienced by European NATO members, often referred to as the Peace Dividend, was significantly disrupted following Russia's invasion of Ukraine. In 2022 alone, Central and Western European countries collectively spent a record-breaking $345 billion on military expenses, marking the highest spending level since the end of the Cold War. [2]
Yet, more military expenditure is expected. Most European NATO members still fall short of the alliance's 2% of GDP military spending target - a situation deemed untenable considering the current geopolitical context. Poland exemplifies this new stance, committing to spend 4% of their GDP on defence in an ambitious attempt to create Europe's largest land army. [3]
In addition to increasing military personnel, there is a surge in demand for advanced weaponry. The US-made HIMARS, a guided missile rocket launcher system that played a pivotal role in Ukraine's defence against Russia, is a prime example. Ukraine is currently equipped with between 20-40 HIMARS - Poland is in the process of procuring 500 of these systems. The defence ETF is positioned to capitalise on the manufacturers of this military equipment given the surge in demand.
But in the 21st century, national security is not just about physical borders and military strength. Governments must now consider safeguarding cyberspace, which has become a new battleground.
After invading Ukraine in 2014, Russia carried out a multitude of largescale cyberattacks on the country. These attacks impacted government agencies, critical infrastructures like railways or ATMs, and even temporarily shut down the Chernobyl radiation monitors.
Since the full-scale invasion of Ukraine in 2022, state-sponsored actors have targeted 128 governmental organisations in 42 countries that support Ukraine.
Other nation-states such as China, North Korea, and Iran have also carried out politically motivated cyberattacks on government and private sector targets. Indeed, cybersecurity attacks increase consistently with growing geopolitical tensions, according to the European Union Agency for Cybersecurity’s latest Threat Landscape report.
The United States, being highly automated and interconnected through the Internet of Things, is potentially the most vulnerable nation to cyberattacks. Their reliance on internet-enabled devices for convenience and efficiency has inadvertently created the world’s largest attack surface.
The defence ETF brings these two components of modern defence together, capturing both growing conventional military budgets and the rising need for robust cybersecurity defence.
Using a passive, rules-based approach, companies must derive more than 50% of their revenues from the manufacture and development of military aircraft and/or defence equipment or have business operations in cyber security contracted with a NATO+ member country.
Future of Defence UCITS ETF (NATO) provides exposure to the companies exposed to NATO and select NATO+ ally defence and cyber defence spending.
Areas of Defence
Source: GAO analysis of Department of Defence Information
Additional sources available on request