Last year, countries around the world, led by the U.S., spent $2.7 trillion on defense. With European nations committing to increased defense expenditures, it’s unlikely that figure will decline soon. The path of least resistance is likely steady increases over the long term. The theme of steadily rising aerospace and defense budgets, particularly in Europe, could be a catalyst for an array of ETFs. This includes the WsdomTree Europe Defense Fund (WDEF ). The fund follows the WisdomTree Europe Defense Index. It could be a prime example of a new ETF (it debuted in July) being at the right place at the right time.
The theme of elevated European military spending could prove durable for multiple reasons. One of them is that the Russia/Ukraine conflict is more than three years old. It’s become the deadliest European war since World War II. That signals to countries throughout the continent they must commit larger portions of their budgets to defense to ward off potential acts of aggression by Russia.
WDEF Could Be Supercycle Play
Europe and other regions are committing to boosting defense expenditures. So some experts believe a new, perhaps long-lasting era of defense spending is dawning. That underscores the case for ETFs such as WDEF.
“These changes are also bringing on a new defense spending supercycle—a prolonged period of higher military spending driven by geopolitical conflicts, shifting security priorities, and other factors, noted Loredana Muharremi of Morningstar. “We expect an increase in European defense spending to be a key driver of this new cycle.”
Europe’s military spending resurgence is obviously relevant to investors evaluating WDEF. But that theme is also a reminder of the need to perform due diligence. Translation: Investors should seek ETFs with strong exposure to some of Europe’s biggest defense spenders. That group includes Germany, as it accounts for more than 20% of WDEF’s geographic weight.
“Europe is set to drive the new defense supercycle, with Germany leading much of the incremental spending,” added Muharremi. “Berlin’s 2025 defense budget is projected at about $110 billion, making it the world’s fourth-largest spender, behind Russia at roughly $190 billion. Russia’s war against Ukraine and Indo-Pacific conflicts are also two key factors fueling higher defense budgets on a global scale.”
WDEF's Allure Grows
Data confirms European defense budget growth will far exceed comparable growth in the largest defense-spending nations. That adds to the long-term allure of WDEF.
“European defense budgets are set to grow 6.8% annually from 2024 to 2035, outpacing the US (1.7%), Russia (3.2%), and China (3.1%). Europe’s share of global defense spending is projected to increase from 16% to 22% by 2030, stabilizing through 2035,” concluded Muharremi.
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