European defense ETF slips; analysts see buying chance

The WisdomTree Europe Defense Fund (WDEF) has moved lower as European defense and aerospace stocks have retreated, and some analysts say lower valuations and sustained increases in national defense budgets could support the fund over time. WDEF marks about one year since its launch next month.

Defense-focused equities and related ETFs have underperformed this year after investors who expected a spike tied to the Iran conflict did not see sustained gains. Several large U.S. defense firms pulled back after reports of talks aimed at a truce, and European companies linked to the Russia-Ukraine war have also weakened despite ongoing heavy fighting in the region.

WDEF concentrates on aerospace and national security companies across Europe. The fund’s geographic exposure is concentrated: France and Italy together account for roughly 35% of the portfolio, and nearly a third is allocated to stocks in Germany, Sweden and Norway. Those central and northern European countries have announced plans for larger and sustained defense budgets.

Analysts identify two factors that could affect WDEF holdings. Valuations for some European defense stocks have declined from earlier levels. Separately, many European governments have raised defense spending and have signaled that higher outlays will continue into the next decade. George Ferguson, a senior aerospace and defense analyst, estimated aggregate European defense spending at about $500 to $600 billion and said governments are likely to continue increasing annual budgets.

Budgetary capacity differs across countries. France and Italy face tighter fiscal constraints, which may limit how quickly they can raise defense spending. In contrast, some central and northern governments have more fiscal room to increase budgets, a point relevant to WDEF because of the fund’s allocation to Germany, Sweden and Norway.

Investors who had taken short-term positions expecting an immediate boost tied to the Iran situation saw that trade disappoint. Headline-driven volatility has pushed many stocks in the sector lower, and some investors view the recent price weakness as a potential entry point.

The material supporting this report was produced in connection with a paid sponsorship by WisdomTree and supplied by VettaFi. It is presented for educational purposes and should not be taken as investment or tax advice.