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Asset managers are rushing to set up exchange traded funds focused on Europe’s defence sector as a recent rally has prompted investors to rethink their stance on including controversial stocks in their portfolios.
Amundi, Europe’s largest asset manager, is working on the summer launch of a European ETF linked to defence companies in anticipation of a surge in military spending across the continent, according to two people familiar with the situation. VanEck, a $114bn US fund manager, is also exploring the launch of a similar investment vehicle.
“There is a massive race to set up these products,” said Kenneth Lamont, an analyst at data provider Morningstar, adding that asset managers “are turning [them] around quicker than I’ve ever seen”.
Earlier this month, US firm WisdomTree listed what it said was the first ETF to focus only on European defence companies on stock exchanges in Germany, Italy and the UK. The fund has attracted more than $575mn in inflows since then and already become the platform’s second-largest thematic fund in Europe.
“There is very, very big interest,” said Pierre Debru, head of European research at WisdomTree. “We have pension funds reaching out but also wealth managers, retail investors . . . we see clients from all over.”
The sudden burst of investor interest in European defence comes after the US cut off military support to Ukraine in an abrupt pivot towards Russia, with many European governments now planning to increase their domestic arms production in pursuit of strategic autonomy.
The Stoxx Europe Total Market Aerospace & Defense index is up 34 per cent this year, far outstripping the broader Stoxx Europe 600, as investors anticipate a spending boom.
The rally marks a return to favour for a sector that has often been shunned by the continent’s big investors. Funds investing under an environmental, social and governance framework have frequently excluded defence companies, such as Germany’s Rheinmetall and Italian group Leonardo, from their portfolios.
But some pension investors are considering softening their defence exclusions, arguing that investing in arms manufacturers has become important for defending democracy.
Anders Schelde, chief investment officer at Danish pension fund AkademikerPension, said he was quite sure its defence policy would be debated at the annual general meeting next week. “I won’t exclude that the board might soften our stance,” he said, adding that the current exclusion policy was “quite strict”.
Ronald Wuijster, chief executive of APG, which manages €616bn on behalf of four Dutch retirement funds, said it “may be able to do even more” to help finance Dutch and European defence. Europe’s largest pension fund manager currently invests about €2bn in companies linked to the sector.
“I have never seen a shift like this [for European markets] . . . We can’t view the US as a safe, reliable partner any more and we are seeing this in where the money has gone in recent weeks,” said Aleksander Peterc, an equity analyst at Bernstein.
A long period of underperformance in Europe seemed to be coming to an end with “all investors wanting to join the party”, he added.
Tom Bailey, head of research at London-based HANetf — which this week announced plans to launch a European defence ETF — said investors had “definitely become softer” when it came to including defence companies in their portfolios.
“Before some would find it uncomfortable to add any defence company, but now interest is surging from everywhere,” he said.
Historically, investors had been “squeamish” about putting money into the military sector, said Mike Eakins, chief investment officer of Phoenix, the UK’s largest retirement and savings provider.
But now, he said, “long-term asset owners . . . should be investing more in defence”.
