Instability Prompts a Rethink of Investing in Defense

Just a year and a half after peace broke down in Europe for the first time in a generation, defense is the new growth industry. After languishing or growing slowly for years following the fall of the Berlin Wall in 1989, military spending is expanding fast once more.

Total global military expenditure increased by 3.7% in real terms in 2022, to reach a new high of US$ 2,240 billion, according to data from the respected Stockholm International Peace Research Institute. Military expenditure in Europe saw its steepest year-on-year increase in at least 30 years – Russia and Ukraine accounted for the bulk of this but other countries too were shocked into higher spending.

Unhappily, the world has changed from the years when countries celebrated the peace dividend, a term used to describe the economic benefits of a decrease in defense spending. Instead, they’re ramping up military expenditure and equity investors would do well to adapt to the likely reality that this will keep rising in the years ahead.

Take Germany, the EU’s largest economy. After years of under-investment, its Bundestag, or lower house of parliament, approved a one-off €100 billion fund to help re-build the military following years of neglect. On top of that, the country is poised to increase its regular defense budget by approximately €10 billion in 2024¹.

The fund should enable Germany to meet the NATO target of spending 2% of its economic output on defense each year, making it the world’s third biggest military spender behind the United States and China. But Germany’s not the only country to have neglected its armed forces. Many NATO countries have regularly spent less than the 2% target and are now rushing to catch up.

It's for this reason that VanEck launched its Defense ETF last March. As geopolitical relations deteriorate, the issue of security and defense has once again become one of the top concerns for governments. Our ETF provides investors with diversified access to at least 25 leading defense technology companies, large-scale cyber security firms and defense-relevant service providers based in NATO countries or NATO-friendly countries.
Please also consider the related risks before investing.

What our ETF doesn’t invest in is controversial weapons. These include the types of weapons banned by the Oslo Treaty and Ottawa Convention.

The Ukraine war has prompted a rethink of whether defense companies could be thought of as socially sustainable. EU proposals in 2021 to label defense as socially harmful were quietly ditched. Meanwhile, several investors are moving back into the sector. For instance, Saab AB, which makes Sweden’s Gripen fighter jets, had found itself shunned by funds until 2022². Since then, investors have reinvested, recognizing that democracies must have strong militaries if they are to deter aggression.

Saab’s share price and those of other defense companies have rallied recently, as reflected in the rising price of our ETF. Investors are returning and order books filling. With an eye to the longer term, though, defense is being recognized as an essential industry that needs to grow and increase its capacity in order to make the world a safer place.