Defense Spending Could Keep Momentum on This ETF’s Side

The momentum factor is helping to propel strength in international equities. So defense spending, especially in Europe, could keep momentum on the side of the Invesco S&P International Developed Momentum ETF (IDMO).

The ongoing Russia/Ukraine conflict has been a catalyst for increase spending in recent years, but as research from Goldman Sachs noted, previous years were marked by underinvestment. Fast-forward to today, members of NATO agreed to earmark 5% of their gross domestic product specifically for bolstering their defensive capabilities over the next decade.

A Need to Increase Self-Reliance

Until just recently, Europe has been mostly reliant on the United States for defense procurement until the political landscape changed in the beginning of this year with a new administration. With the U.S. threatening to decrease its involvement in NATO affairs, the byproduct of this geopolitical event is a larger onus on European nations to prop up its own defense mechanisms and increase self-reliance.

As Europe continues to ramp up defense spending, it can have a net positive effect on its economic growth. VettaFi’s “Investment Case for European Defence” highlighted the effects of this higher defense.

“Europe is ready to massively boost its defense spending. Both, to respond to the short-term urgency to act and to support Ukraine but also to address the long-term need to take on much more responsibility for our own European security,” said European Commission President Ursula von der Leyen in March.

One of the funds that could benefit from a spillover in defense spending is IDMO, which garnered $1 billion in assets this year. From a sector standpoint, it mostly resides in financials, but its country allocation includes European nations like Germany, with a 15% allocation, and the United Kingdom, with a 16.68% allocation. Additional European country exposure is spread across Italy, Spain, and France. In aggregate, defense spending and its effects on economic growth in Europe could trickle down to strength in IDMO.

IDMO’s Defensive Play

The fund’s top holding (a 3.64% allocation as of October 1) is Rolls-Royce Holdings, which maintains a strong foothold in the European defense industry. However, its name might be more synonymous with luxury vehicle production. Nonetheless, the company also has a strong presence in the U.S. So while Europe is bolstering its defense spending, it can also capture ongoing growth domestically in the U.S. as a key supplier to top names in the aerospace and defense industry.

“Rolls-Royce products and services support key customers across the United States including the U.S. Department of Defense, Boeing, Lockheed Martin, Northrop Grumman, Bell, Robinson Helicopter, Gulfstream, and major commercial airline providers such as American Airlines, United, and Delta,” Rolls Royce noted on its website.

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