WisdomTree launches first European-only defence ETF

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The first exchange traded fund to focus only on European defence companies has come to market, coinciding with a frenzied reappraisal of Europe’s reliance on the US after it cut military aid to Ukraine.

The WisdomTree Europe Defence Ucits ETF (WDEF) listed today on Deutsche Börse Xetra and Borsa Italiana and will start trading on the London Stock Exchange on Wednesday.

It follows a proprietary index that WisdomTree launched in October 2024 with the intention of creating the ETF.

“When we decided to launch an ETF for this theme it was not very clear whether [President Donald] Trump would win, but we were very clear on the under-investment gap of Europe vs the US,” said Aneeka Gupta, director of macroeconomic research for Europe at WisdomTree.

The ETF invests in 20 European companies that manufacture civil defence equipment, defence electronics and space defence equipment and seeks to exclude companies involved in controversial weapons banned by international law, such as cluster munitions and anti-personnel mines.

Its biggest holding is Rheinmetall, Germany’s largest defence company, which currently accounts for more than 18 per cent of the index. Leonardo, the Italian defence company, is more 15 per cent, Saab and BAE Systems are nearly 10 per cent each and Thales is around 9 per cent.

A small number of companies and hefty exposure to those at top of the index are usually warning flags for investing in any narrow-themed fund.

But Gupta pointed out the large exposure to Rheinmetall was as a result of its share price nearly doubling since the start of the year. The index will rebalance twice a year on the third Friday of March and September and its methodology dictates that the maximum weight, even for industry powerhouses such as Rheinmetall, is capped at 12.5 per cent, which ensures compliance with Ucits diversification rules.

She conceded that the white-hot interest in European defence companies had led some potential clients to express concerns that the theme might be overpriced and that now might be an expensive time to buy.

But she argued that the EU’s European Defence Industrial Strategy proposed spending at least 50 per cent of procurement budgets within the bloc by 2030 and 60 per cent by 2035, which meant there might still be considerable upside for European companies.

Existing European-domiciled defence ETFs offer global exposure and money has flooded into the two largest, the $3.3bn VanEck Defense Ucits ETF (DFNS) and HANetf’s $1.6bn Future of Defence ETF (NATO) since the start of the year. Both DFNS and NATO have an exposure of more than 50 per cent to US defence companies.

“There are decades where nothing happens and weeks where decades happen. This, it would seem, applies to the past few weeks. European leaders are scrambling to reorganise the entire security architecture of the continent,” said Hector McNeil, co-founder of HANetf.

HANetf said the NATO ETF had already attracted more than $700mn of net new assets since the start of the year.

“The current climate will likely push European leaders to reduce reliance on the US as much as possible,” McNeil said, adding that NATO offered a diversified way to access exposure to European defence companies.

Martijn Rozemuller, chief executive of VanEck EU, told the FT last week that the limited number of defence-focused companies in Europe would make it hard to create a purely European defence ETF due to Ucits rules on diversification.

The WisdomTree index methodology allows investment in companies with an exposure as low as 10 per cent to defence activities.