European Defense Stocks Surge Amid "Donroe Doctrine"... Should You Invest via ETFs?

Strengthening European Defense Capabilities: Defense Stocks Like Rheinmetall Rally
Two European Defense ETFs Listed Domestically Draw Attention
"European Defense Companies Enter a Phase of Long-Term Growth"

As shifts in U.S. diplomatic and security policy intersect with rising geopolitical tensions, defense industry stocks are once again drawing attention in European equity markets. Concerns are mounting over the so-called "Donroe Doctrine," which combines the isolationist "Monroe Doctrine" with President Donald Trump's strategy of maximizing national interests. This is accelerating efforts within Europe to strengthen its own defense capabilities. Among domestic investors, exchange-traded funds (ETFs) focused on European defense are being discussed as an alternative to individual stock picks. Of the ETFs listed in Korea, there are two products that invest exclusively in European defense: the ACE Europe Defense TOP10 ETF and the HANARO Europe Defense ETF.

According to the financial investment industry on January 12, the ACE Europe Defense TOP10 ETF and the HANARO Europe Defense ETF have risen by 17.7% and 16.7%, respectively, since the beginning of this year. These returns outpace the 8.8% increase of the KOSPI index over the same period. This performance is attributed to the simultaneous rise in the share prices of leading European defense companies such as Rheinmetall of Germany, Saab of Sweden, and Leonardo of Italy.

The ACE Europe Defense TOP10 ETF selects its investment targets from companies with at least 20% of their revenue derived from the defense industry, based on a combination of market capitalization and projected 12-month sales growth. It includes major European defense firms such as Rheinmetall of Germany, BAE Systems of the United Kingdom, Saab of Sweden, Thales of France, and Leonardo of Italy.

Rheinmetall manufactures ground force weaponry, including tanks, self-propelled artillery, armored vehicles, and ammunition. Its order backlog has surged significantly since the outbreak of the Russia-Ukraine war. BAE Systems produces fighter jets and naval vessel components required to strengthen army, navy, and air force capabilities. Saab, a leading comprehensive defense company in Northern Europe, is also showing improved performance.

The HANARO Europe Defense ETF is a product that diversifies investments across European defense companies, constructing its portfolio with firms selected by Amundi, the largest asset management company in Europe. It invests broadly in companies such as Thales and Safran of France, Rolls-Royce and BAE Systems of the United Kingdom, and Rheinmetall of Germany. While its investment targets are similar to those of the ACE Europe Defense TOP10 ETF, the allocation ratios for each stock differ.

Industry experts analyze that recent geopolitical changes have become a powerful catalyst for European defense stocks. Mo Seyoung, Head of ETF Product Strategy at Korea Investment Management, explained, "Geopolitical uncertainty is rising following President Donald Trump's recent mention of a possible military occupation of Greenland, which is driving the surge in European defense stocks." He added, "The North Atlantic Treaty Organization (NATO) has agreed to increase defense spending to 5% of GDP by 2035, and we estimate that Europe's total defense budget will rise to approximately 1,500 trillion won."

Kim Seungcheol, Head of ETF Investment at NH-Amundi Asset Management, stated, "Earlier this year, the United States launched a military operation to arrest President Maduro of Venezuela. Changes in the global power structure are expected, including the maximization of U.S. influence in North and South America and the exclusion of Eurasian intervention." He emphasized, "Europe's own defense investments are expected to expand further, in anticipation of reduced U.S. security support."

As European defense emerges as a growth driver in the global defense market, ETFs that include both U.S. and European defense stocks are also attracting attention. The PLUS Global Defense ETF equally includes five U.S. and five European defense stocks, pursuing both stability and growth.

The asset management industry expects the European defense sector to maintain long-term growth. With geopolitical risks persisting and increased defense spending now institutionally mandated, the European defense industry is said to have entered a structural growth phase that will last for more than a decade. Kim Yongcheol, ETF Portfolio Manager at Hanwha Asset Management, analyzed, "The security and economic changes following the Russia-Ukraine war are driving Europe's rearmament and supply chain restructuring, and the European defense industry is entering a phase of sustained growth."

President Trump's emphasis on expanding the U.S. defense budget is also expected to contribute to the growth of the global defense industry market. Seo Jaeho, a researcher at DB Securities, explained, "President Trump insists that the defense budget should be increased to 1.5 trillion dollars, making it clear that military buildup is a central focus of his administration."

However, due to the nature of the defense industry, it is important to note that volatility may increase depending on geopolitical news. Experts recommend that, given the structural growth phase expected to continue for more than a decade in the European defense sector, investors should carefully adjust their timing and allocation when making investments.