VettaFi’s Axel Belorde appeared in ETF Stream’s live webinar, “European Defence Revolution: Investing in the Next Generation of Security.” Host and Editor Jamie Gordon and HANetf’s Head of Research Tom Bailey also filled out the panel.

European defence booms amid geopolitical tensions

The end of the Cold War marked a decades-long decline in military spending around the world. Europe experienced this particularly harshly, with huge drop-offs until 2014, when Russia invaded Crimea. This resulted in a pledge by NATO members to achieve a 2% of GDP defence spending target by 2024.  Russia’s invasion of Ukraine has led to substantially more massive spending upticks, with nearly 18% in 2024, and 2025 is on track for even more spending.

According to Bailey, much of the increase in spending is likely to be on equipment, which Europe has historically neglected following the end of the Cold War.

Future of Defence UCITS ETF

HANetf’s Future of Defence UCITS ETF, developed with TMX VettaFi as the index partner, looks to take advantage of the increase in European defence equipment spending. Capping any country at 60% of holdings means the fund is underweight US and is positioned with enough exposures to take advantage of growth in the European defence sector. This unique defence ETF splits its exposures primarily between industrials and technology, including cybersecurity.

“It is important to think that there are many areas of defence. You can’t just get it — in terms of exposure in your portfolio — if you buy your traditional industrial exposure,” Belorde noted. Traditional war might be waged on land, sea, or air, but cyber is becoming more critical. “Increasingly, it's more about data, and this is how we built our investment approach.” 

Covering the entire defence value chain

Rather than limiting exposures purely to industrials, Belorde made the case to capture the entire value chain of conflict. Hardware is important, but data wins wars, according to him. “The wars of tomorrow, the special operations of tomorrow, often start with cyber attacks.”

One often-overlooked investment arena is in the securing of information flow. In war, data is important but, Belorde noted, “better no data than compromised data.” Companies like CrowdStrike and Paloalto help provide the data security that is becoming an increasingly critical component of modern warfare.

Further making the case for a diverse array of companies and the importance of cybersecurity exposures in defence investing portfolios, Belorde asked, “When you build great hardware … are you the best at building great software?”

Cyber defence in future wars

More and more countries in NATO are allocating larger portions of their defence spending to cybersecurity. Sharing declassified information from the US Department of Defense, Belorde said, “There’s huge danger if the assets deployed once or twice do really well, but for example, the signatures get inverted, and your own equipment starts to destroy your own new technology. This is why we want to allocate to cyber defence players.”

The EU view

The European Defence Agency is increasingly seeing the value of cognitive superiority. Achieving that requires:

• Competition for intellectual superiority
• Nearly real-time situation awareness
• A multidomain operational picture
• Automation of cyber activities

• Real-time narrative

Belorde noted, “This requires a lot of effort in terms of integration, of permissioning data sets, and increasingly permissioning AI agents into the loop.”

One of Europe’s defence challenges is that it has a fragmented supply chain of in-service weapons. It also has significantly more suppliers, as different countries have different tech preferences, systems of operation, and military needs. While the US has 33 different weapon systems to maintain, Europe collectively has 179. Additionally, the period between the Cold War and the invasion of Crimea was such a decline in European military spending — particularly on the equipment side — that some systems are now obsolete but still in service. 

“The problem is, when you want to work together, you do need to integrate data,” said Belorde. “Leaders around the world are increasingly concerned by that, and they want to buy software that solves for that problem.”

It is worth remembering that pure-play cybersecurity companies aren’t common in Europe, and some key firms aren’t even listed. “In Europe, you’re just going to have to monitor the private markets and wait for some of the names that are pure play defence companies to be listed,” he added.

What the US can reveal about European possibilities

The US Department of Defense spends 1% of its budget on software. That sounds low, but it is a significant difference maker and gives America a military advantage. “To win, you have to spend more on software,” Belorde said. Even if the new administration is looking for budget cuts, there’s an understanding that the Department of Defense is likely going to be spared those cuts. Software spend is expected to increase, including investment in disruptive technologies. “The spending mix has to go more toward operational AI and the overall bucket of software allocations should grow,” he explained.

The US is also deeply invested in AI. AI has enormous military potential. BVR (beyond visual range) combat is possible with enough advancements in technology. Anti-aircraft and drone countermeasures, and small, underground drones can all provide a critical edge. “Increasingly, you will see autonomous systems versus autonomous systems,” Belorde said. As there are fewer and fewer full-time soldiers, the role of robotics and automation are gaining increased military importance. 

Space, above & beyond

One if by land, two if by sea, three if by air and … four if by space? 

Though space might not be a viable option for an invading force, it is likely that it will play an increasingly important role in warfare. Much of this is due to technology, including AI. “AI is pretty good at processing mass satellite imagery and trying to extract information from it,” Belorde noted. 

Human operators are still needed, as AI continues to struggle with picking up on small objects, but satellites in space are expected to play an important role in the future of warfare. This, in turn, also speaks to the importance of automation. The companies that create and maintain satellites are likely to be beneficiaries of increased defence budgets. As geopolitical tensions mount and real-time information becomes critical, companies engaged in conquering “the final frontier” could see increased relevance, creating opportunities for investors.

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