Ask the Manager: Tom Bailey on the Strategic Case for a Europe-Focused Defence ETF

In this edition of Ask the Manager, Tom Bailey, Head of ETF Research at HANetf, discusses the launch of ARMY, a Europe-focused defence ETF. He explains how ARMY offers targeted exposure to European defence firms, differentiating itself from broader industrial or NATO-aligned ETFs. Bailey also addresses ESG considerations and outlines ARMY's role as a thematic investment in Europe's evolving security landscape.

What was the primary motivation behind launching a European-exclusive defence ETF, especially considering the broader NATO-focused ETF already available?

The ETF was launched to provide a dedicated vehicle for investors who want to capture the European rearmament story directly. The NATO ETF provides a broad global exposure.

But many investors increasingly want targeted exposure to Europe’s security rebuild, driven by the war in Ukraine, pressure to meet NATO spending targets, an isolationist US, and EU- and government-level efforts to boost defence spending.

This isn’t just about defence but also about European strategic autonomy, industrial policy, and capital market sovereignty. As a European ETF issuer, with a strong track record in defence thematic space, we felt we were uniquely positioned to provide this ETF. 

How does ARMY differentiate itself from broader European industrial or aerospace ETFs that may have incidental defence exposure?

Industrial or aerospace ETFs can be blunt tools when it comes to defence. They’ll give you exposure to civil aviation and general manufacturing, but not necessarily a high-conviction allocation to pureplay defence companies.

With ARMY, we’ve tried to create a much more pureplay focused product. We also have included those engaged in cyber-defence, a crucial part of the defence theme that industrial or aerospace ETFs may not provide exposure to.

Can you walk us through the index selection process?

We partnered with VettaFi to design a methodology that screens for listed companies headquartered in Europe with significant exposure to defence.

The index requires constituent to have material portion of their revenues from the manufacture and development of defence equipment, defence technology applications, or cyber security contracting with a NATO+ member nation verified by publicly available contract information.

The purer play defence companies (50% revenue or more) are also given a higher weight limit to add to the purity of exposure to the theme.

Which European countries or defence ecosystems currently dominate the ETF's exposure, and how might this evolve with new EU defence initiatives like Readiness 2030?

Currently, the fund’s exposure is led by counties like the UK, Germany, France, Italy, and Sweden - home to major players like BAE Systems, Rheinmetall, Thales, Leonardo, and Saab.

These are the established hubs of European defence innovation. But we expect this to broaden. As initiatives like Readiness 2030 and increased pan-European procurement kick in, we could see greater participation from Central and Eastern Europe -countries like Poland, the Czech Republic, and the Baltics, which are rapidly scaling up their domestic defence capabilities.

Are there companies in ARMY that might surprise investors, i.e. holdings that are not household names but are crucial to the European defence ecosystem?

Absolutely. Investors may know the “headline names,” but there’s a deep supply chain behind European defence.

Companies like Chemring in the UK, which provides countermeasures and sensor technology, or Hensoldt in Germany, a leader in battlefield radar and optics, are essential players that don’t always get mainstream attention.

With rising geopolitical uncertainty and recent U.S.–EU tariff tensions, what macro or trade-related factors do you believe could impact the ETF’s performance in the short to mid-term?

The full ramifications – and indeed, the full extent – of Trump’s tariffs remain to be seen. What can be said is that the trade tensions are emblematic of a less certain world– and in such an atmosphere, countries may be encouraged to look at local solutions for various industries.

Already, there is a feeling among European nations that the U.S. is no longer a guarantor of security.

Relying on U.S. technology, equipment, and munitions is not congruent with the idea of European security independence. Both the US security umbrella and its commitment to global free trade were key features of the post-war era – that era may now be coming to a close.

How should ARMY be positioned in a diversified portfolio? As a sector tilt, a geopolitical hedge, or a long-term thematic play?

We’ve seen it used as all three – it is depending on the investor. Some will use ARMY as a tactical sector tilt, especially in response to news flow around NATO, EU defence budgets, or regional conflicts.

Others see it as a geopolitical hedge: an exposure in a world of rising geopolitical risk. But increasingly, investors are viewing European defence as a secular growth story. ARMY provides access to that structural rearmament trend.

What are some of the most common questions or concerns you hear from investors about the ARMY ETF or European defense investing more broadly?

Investors often ask about ESG concerns. There’s a growing view that defence is a public good - essential to democracy, stability, and peacekeeping. What ARMY does do is employ the aforementioned NATO screen, limiting exposure to defence names domiciled in NATO or NATO+ ally member states.

In this way, the ETF seeks to align with the values of investors who may have concerns about defence investing, but cannot ignore the current political climate, and therefore seek a smarter and more considered approach.

NATO is a defensive alliance and itself states that “deterrence and defence is one of its core tasks” – focusing on companies operating in NATO allied countries limits the possibility of constituents of the ETF being companies operating in countries that could one day be adversaries to the alliance.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.