Thales: A fund manager launches Europe’s first ETF on defense stocks

(BFM Bourse) – The defense industry has regained favor with investors since the war in Ukraine and the increase in military budgets resulting from this conflict. Fund manager VanEck is now offering investors exposure to companies in this sector with a dedicated ETF.

The war in Ukraine has put the defense sector back on investors’ radar. Values ​​in this previously shunned sector soared last year. They were supported by the arms race induced by the outbreak of the conflict between Ukraine and Russia. “The year 2022 was a year to play defense on the stock market,” recalled Jefferies.

A year after the invasion of Ukraine by Russia, many European states have decided to increase their budgetary envelopes to better equip their armies. The French government, for example, plans a budget allocated to the French armies of more than 400 billion euros for the period 2024-2030. An initiative that the government motivates by the military conflict between Russia and Ukraine. At the end of January, it was Poland, the country closest to this conflict, which announced that it was going to devote 4% of its GDP to defense in 2023.

Rheinmetall, an industrial conglomerate which supplies armor to the German army, for example, has seen its price increase by more than 2.5 on the Frankfurt Stock Exchange, since February 24, 2022, the day of the Russian invasion in Ukraine. Moreover, the German arms giant entered the club of 40 flagship companies of the Dax, the star index of the Frankfurt Stock Exchange, on March 20. Final consecration for the constructor of the Leopard 2 tank.

Only ETF dedicated to the defense sector in Europe

In this context of an arms race, the American fund manager VanEck announced the launch of its ETF exposed to players in this sector which, by force of circumstance, is regaining favor with investors. The VanEck Defense UCITS ETF offers institutional and individual investors access to the main companies in the defense sector located in developed countries (United States, France, Germany, United Kingdom).

The fund intends to invest in companies that derive the majority of their income from defence-related products or services: defense equipment, aerospace technology, communication systems and services, satellite technology, unmanned aerial vehicles , security software, computer hardware and services, cybersecurity software. The investment universe is extended to training and simulation solutions, digital forensics, tracking devices and electronic authentication or biometric identification applications.

The management company nevertheless takes care to filter issuers producing “so-called controversial weapons” in its investment approach. This typology of weapons includes anti-personnel mines, cluster munitions, depleted uranium as well as producers of chemical and biological weapons.

“Since the start of the war in Ukraine, opinions on security and defense policy have started to change, as the need for a security policy has become more evident,” says Martijn Rozemuller CEO of VanEck Europe. Due to Russia’s invasion of Ukraine, tensions in Asia and global uncertainty, security and defense are back on the minds of investors after being shunned for several years,” continues Martijn Rozemuller.

This brand new ETF in the range marketed by VanEck is the only one in Europe to offer access to the defense sector. It will be listed on both the London Stock Exchange and the Frankfurt Stock Exchange (Deutsche Börse).

The fund tracks the MarketVector Global Defense Industry Index, which includes 31 companies active in defense equipment, aerospace technology, communications, satellites, security and IT hardware and software, unmanned aircraft, training and simulation, and biometric identification.

The composition of the fund does not hold many surprises. Thales is at the top of the main convictions of this dedicated defense fund. The largest increase in the CAC 40 in 2022 (+59.4%) represents 8.91% of net assets.

The technology and defense group is closely followed by Safran (8.41% of net assets). On the third step of this podium, we do not find a French group but an American one. This is Palantir Technologies (8.24% of net assets) which owns online monitoring and analysis tools, in physics, on behalf of governments, armies and private sector companies. At the end of September 2022, the American company won two contracts with the Department of Defense and the Department of Homeland Security of the United States.

At the tenth place of the biggest convictions of VanEck Defense Ucits ETF, we note the presence of another French flagship of the defense sector: Dassault Aviation. The Rafale manufacturer, which saw its price soar by 66.5% in 2022, weighs nearly 4% of net assets. Stifel considers that “potential large Rafale orders could further stimulate the action this year”. However, Dassault Aviation has several customers on its radar, including Colombia and India, its main prospect. In total, the ETF’s top 10 positions account for nearly 63% of overall net assets.

With the arrival of the newcomer, VanEck is expanding an already well-stocked range of thematic funds. The fund manager is already offering investors the opportunity to position themselves in a rapidly growing video game sector with the ETF VanEck Video Gaming and eSports or to bet on the pioneers of sustainable food of tomorrow with the ETF VanEck Sustainable Future of Food.

Sabrina Sadgui – ©2023 BFM Bourse

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