Top 3 ETFs Defense Hawks Are Buying
Global military spending is accelerating, with total worldwide military expenditures for 2024 estimated at $2.72 trillion. This marks a 9.4% increase in real terms over 2023 levels and the sharpest year-over-year (YOY) rise in decades. While spending in the major military powers of the United States, Russia, China, Germany, and India still accounts for the majority of total defense spending, budgets in other parts of the world are also increasing, particularly given instability in the Middle East and concern in Europe about the escalation of Russia's invasion of Ukraine.
Defense hawk investors who believe this trend is likely to continue may be inclined to invest in aerospace and defense firms that are most likely to benefit from increased military spending. Individual investments in this area are accessible for U.S. investors but less so for international defense companies. Hawkish investors seeking broader international exposure to the defense space might consider a dedicated and expansive exchange-traded fund (ETF) targeting this industry.
Targeted Global Defense Exposure in a Popular Fund
[content-module:CompanyOverview|NYSEARCA:SHLD]
The Global X Defense Tech ETF (NYSEARCA: SHLD) has more than $2 billion in assets under management (AUM), making it one of the largest and most popular defense-focused ETFs. SHLD includes about 40 holdings with companies in the industrials, cybersecurity, AI, and drone systems spaces.
The fund is fairly concentrated, with positions in German automotive and arms manufacturer Rheinmetall AG (ETR: RHM) and U.S.-based Palantir Technologies Inc. (NASDAQ: PLTR) together accounting for more than 21% of the portfolio. Just over half of the portfolio is given over to U.S. companies, with Germany, France, Britain, and South Korea among the other markets best represented.
SHLD offers an expense ratio of 0.50%, which is somewhat high for a passively managed fund but understandable given its global exposure and specialized theme. What's more, the fund's performance in recent months has likely more than made up for its fee—SHLD has returned nearly 52% year-to-date (YTD) and 69% in the past 12 months.
North American and European Focus With a New Fund
[content-module:CompanyOverview|NASDAQ:NATO]
The Themes Transatlantic Defense ETF (NASDAQ: NATO) is a fund specifically focused on aerospace and defense stocks headquartered in the 32 North Atlantic Treaty Organization (NATO) member countries across Europe and North America. NATO's portfolio includes more than 70 companies, and the largest position is under 9% of total assets.
This makes the fund somewhat more diversified than SHLD above, even as it has a more narrowly focused geographical purview. NATO is also almost exclusively focused on industrials names, while SHLD gives over a portion of its portfolio to software and AI companies with defense interests as well. More than two-thirds of NATO's portfolio is made up of U.S. companies, with France and the U.K. making up the bulk of the remainder.
NATO comes in ahead of SHLD when it comes to fees, as it has an expense ratio of just 0.35%. Having launched last October, it has a limited performance history, but it has generated returns of about 32% YTD. However, with an AUM of around $24 million and a one-month average trading volume hovering around 17,000, investors may find liquidity to be an issue here more so than for SHLD.
High-Risk, High-Reward 3X Defense Leverage
[content-module:CompanyOverview|NYSEARCA:DFEN]
Direxion Daily Aerospace & Defense Bull 3X Shares Fund (NYSEARCA: DFEN) is a fund reserved for defense investors comfortable taking on a high degree of risk. This ETF provides an opportunity for investors anticipating a short-term rally in U.S. defense stocks, offering daily 3X leveraged exposure to a bucket of about 38 companies. Like SHLD above, DFEN is fairly concentrated, with the top two positions representing more than a quarter of assets invested.
As with other leveraged funds, DFEN is not designed to be held longer than a single day of trading. This means it may be a viable option for investors holding one of the defense funds above long-term but seeking additional targeted exposure in anticipation of an intraday rally in this industry.
Due to its leverage and unique focus, this fund has a higher expense ratio of 0.95%. It also has the highest degree of leverage available in defense ETFs, but there are alternatives providing 2X exposure for investors interested in taking on a more moderate degree of risk.
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