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Asset managers in Asia Pacific rolled out a record number of funds investing in military industries last year in a bid to profit from a planned increase in defence spending amid rising geopolitical tensions.
India, South Korea and Australia all saw a flurry of new defence industry-focused exchange traded funds from firms including VanEck, Mirae Asset, Betashares and Motilal Oswal, after governments in all three nations responded to regional military threats by boosting defence budgets.
Fund firms say they are reacting to investor interest in the sector, while some analysts dismiss potential ethical concerns suggesting that defence companies are being viewed as more ESG compliant due to their vital role in supporting peace and stability.
US asset manager VanEck launched its first defence ETF in Australia in September, the VanEck Global Defence ETF, which tracks the MarketVector Global Defence Industry Index of firms in the military or defence industries. Its top holdings are France’s Thales and the US’s Booz Allen Hamilton Holding.
It was one of three defence-focused ETFs launched in Australia in 2024, the first ever in the market, along with similar products from ETF providers Global X and Betashares.
It was also one of 15 new military fund launches in Asia Pacific last year, up from just one in 2023, five in 2022 and zero in the prior two years, according to Morningstar data.
Russel Chesler, head of investments and capital markets at VanEck Australia, said the VanEck Global Defence ETF, which had raised A$22.7mn ($14.1mn) in four months, was something investors had been looking for, given the growth in the sector.
In 2024, India, South Korea and Australia saw the most new defence fund launches in the Asia-Pacific region.
“We have seen defence spending continue to grow. It is obviously not a great thing that there are more wars in the world, but that’s just the fact,” he said.
“There’s a large volume of investors who aren’t looking at their investments through an ESG lens at the end of the day,” Chesler said.
Defence spending has risen rapidly in the wake of Russia’s invasion of Ukraine in 2022, the start of the Israel-Hamas war in November 2023, rising military tensions in the Taiwan Strait and the formation of the Aukus security partnership focused on developing advance military capabilities in the Indo-Pacific region.
Global military expenditure grew 7 per cent to $2.43tn in 2023, the steepest annual rise since 2009, and is expected to grow nearly 40 per cent to $3.1tn by 2030, according to a Stockholm International Peace Research Institute report.
In 2014, only three members met the defence spending target for European Nato members of 2 per cent of GDP, but by 2024, a record 23 out of 32 Nato countries achieved it, according to the latest Nato statistics.
The Betashares Global Defence ETF, which has A$14.4mn in assets and was listed in Australia less than a month after VanEck’s product, tracks the VettaFi Global Defence Leaders Index.
The launch came just a few months after Australia announced last year that defence spending would increase 6.3 per cent in the next fiscal year, at about 2 per cent of GDP.
Cameron Gleeson, senior investment strategist at Betashares, said there had been a surge of media coverage on the defence sector, boosting investors’ interest in the industry.
“The defence industry is one of the areas where we are having the most engaged conversations with clients right now,” he said.
India also saw the launch of its first defence fund last year, with five new funds introduced, managed by Groww, Aditya Birla Sun Life and Motilal Oswal. This comes as the Indian government raised defence spending by 4.79 per cent for its 2024-25 budget as part of a drive towards self-reliance.
South Korea has seen the highest number of defence funds in Asia in recent years, with 16 since 2018 and four new launches last year from Mirae Asset, Shinhan Financial Group, TimeFolio and Hanwha Group.
Amid rising tensions with China, Yuanta Securities Investment Trust launched the second military fund in Taiwan last year, the Yuanta Global Aerospace and Defense Technology ETF, which has raised NT$14.9bn ($451mn).
Data shows most defence fund launches in the Asia-Pacific region were passive funds or ETFs, with six active funds and nine passive ones.