There are two things that are guaranteed in life – death and taxes. Actually, no – I take that back. There are three things that are guaranteed in life. Death, taxes, and a bull market in defense spending. The world isn’t get safer, and governments don’t ever want to spend less when it comes to defense. If anything, with technological advancements growing exponentially, why not specifically invest in the intersection of defense and technology? That’s what the Global X Defense Tech ETF (NYSEARCA:SHLD) attempts to do.
SHLD is a new fund, having launched on September 11, 2023, as the first exchange-traded fund, or ETF, focused on defense technology. The fund seeks to track the investment performance of the Global X Defense Tech Index, a thematic benchmark that provides exposure to the defense technology sector, which is projected to grow significantly over the next decade.
SHLD invests in a subset of companies that stand to gain from greater adoption and use of next-generation defense technologies, including firms specializing in “cyber” (encompassing defense for networks and information technology systems) as well as those that use artificial intelligence and big data analytics for defense applications. It also includes companies that manufacture military systems and hardware such as robotics, fuel systems, and aircraft.
ETF Holdings: A Closer Look
SHLD has a diversified portfolio of 34 holdings. This isn’t a big fund at $164 million, which candidly I like, as it means it may be an under-looked part of the marketplace. The top positions include some familiar names, and others that are more relatively unknown because they are not based in the U.S.
To that end, 60% of the fund is U.S. I like the international diversification here.
Because defense companies are categorized as Industrials, it’s no surprise that this makes up from a categorization standpoint 95% of SHLD.
Peer Comparison
SHLD is a recent entrant in the defense technology ETF game, but is far from alone in the defense sector side of the ETF landscape. The big competitor there is the Invesco Aerospace & Defense ETF (PPA), which tracks the SPADE™ Defense Index and includes about 50 U.S. companies primarily involved in the research, development, manufacture, operation and support of defense, military, homeland security and space operations. So it’s not as focused on the tech side, but there is clearly some overlap.
When we look at the price ratio of SHLD to PPA, we find that SHLD has outperformed. I think this makes sense given how much the market is rewarding leading edge tech companies and anything tied to them.
Evaluating The Investment Premise: Pros And Cons
On the positive side? Tailwinds everywhere. Governments will keep spending on defense, and investors seemingly want to reward anything related to AI and advanced technology. Kind of as simple as that. It hits all the major things you hope to see from a long-term perspective.
But this could also be its undoing. There is a clear honeymoon going on with AI and anything robotics here, which could end sooner than later. In addition, while geopolitical tensions and conflicts can spur demand for defense technologies, they can also lead to sharp swings in demand and increased cyclicality if investors suddenly turn sour on the theme. And please remember – regulation is rife in the industry, as policies, budgets and procurement strategies by governments, both abroad and closer to home, can have a significant impact on outcomes and prospects for individual firms.
A final concern is that companies might fall behind in key technology trends, losing out to competitors who are adopting the latest artificial intelligence or cybersecurity capabilities, for instance.
Conclusion: Not A Bad Place To Invest
With high geopolitical tension, the growing digitalization of war, and cybersecurity becoming even more critical to countries’ national security requirements, and the emergence of new open-source collaboration models, investors can gain exposure to the latest frontier of defining next-generation defense innovation through SHLD. It’s a good fund overall and very targeted. The long-term arguments are very much in place. I’d consider a small long-term allocation here, and load up more whenever tech goes into a deep correction after.
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