Defense stocks and the related ETFs are frustrating investors this year. Those who wagered that the war in Iran would be a catalyst for domestic defense equities have seen that bet go sour. Making matters worse is that some of the marquee defense names have extended pullbacks on news that the U.S. and Iran are working on a truce. A similar situation is playing out in Europe. Despite the Russia/Ukraine conflict being one of the deadliest and longest in the continent’s history, defense stocks are retreating.
European Defense Boost
However, recent weakness in European aerospace and national security stocks could be opening the door to opportunity with ETFs such as the WisdomTree Europe Defense Fund (WDEF). WDEF, which turns a year old next month, may be an underappreciated idea among defense ETFs at the moment and for simple reasons at that. First, as the conflicts in Iran and Ukraine confirm, the world isn’t safer. Second, and more specific to the war in Ukraine, European countries need to up their defense budgets, particularly as an insurance policy against the U.S. potentially becoming involved in other conflicts outside of Europe.
It’s been widely documented that many European nations are significantly boosting defense spending. In fact, those increased spending levels are expected to last into the next decade. So it’s not a stretch to say that those planned expenditures are factored into share prices of some of WDEF’s holdings.
More Potential Tailwinds for WDEF
However, there are other potential tailwinds for some WDEF member firms. As George Ferguson, senior analyst for aerospace, defence and airlines at Bloomberg Intelligence, said in a recent conversation with BNP Paribas, valuations on some European defense equities have retreated to the point of possibly being enticing. Add to that, the lofty levels at which some European nations are pledging to spend on national security have room to the upside.
“This $500 -$600 billion level is probably not a place that European governments are going to be able to stop [at]. They’re going to have to continue to increase the amount of spend and persistently spend year over year. I think that’s what creates this this opportunity,” Ferguson told BNP Paribas.
Another potential advantage offered by WDEF is geography. France and Italy account for nearly 35% of the ETF’s geographic exposure. While Ferguson noted that these Southern European nations have less budgetary flexibility for significant defense hikes, he points out that Central and Northern European countries have far more fiscal wiggle room. That’s pertinent to investors considering WDEF because the WisdomTree ETF allocates nearly a third of its portfolio to German, Swedish and Norwegian stocks.
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