Global X ETFs has expanded its suite of thematic equity ETFs in the US with a new fund focused on companies developing cutting-edge technologies that contribute to national defense.
Pedro Palandrani, Director of Research at Global X ETFs.
The Global X Defense Tech ETF (SHLD US) has been listed on NYSE Arca with an expense ratio of 0.50%.
According to an April 2023 report from the Stockholm International Peace Research Institute, global defense spending has grown at a 4.2% annualized rate since 2020 – nearly four times faster compared to pre-pandemic levels.
Amid ongoing geopolitical tensions, Global X believes that this trend will continue, estimating that defense spending worldwide will grow by 40% to top $3.1 trillion by 2030.
While traditional defense equipment such as weapons and military aircraft will continue to play a vital role, the firm believes that the increasing prevalence of new types of national security threats will necessitate significant investment in emerging defense technologies.
According to Global X, its latest ETF has been designed to capture this emerging trend, targeting companies that build and manage cybersecurity systems, utilize artificial intelligence and big data, and build advanced military systems and hardware such as robotics, fuel systems, and drone aircraft.
Pedro Palandrani, Director of Research at Global X ETFs, said: “Amid escalating geopolitical concerns, the digital transformation of warfare, and new cybersecurity threats, there is a growing market for militaries to adopt cutting-edge technologies. SHLD will allow investors access to the key developments and companies in the defense sector underpinning this growth opportunity.”
Methodology
The fund is linked to the proprietary Global X Defense Tech Index which selects its constituents from developed and emerging markets worldwide excluding China, India, Kuwait, Pakistan, Russia, and Saudi Arabia. Eligible securities must have market capitalizations greater than $200 million and average daily trading volumes above $2m.
The methodology screens for firms deriving at least 50% of their revenue from military contracts related to the sub-themes of cybersecurity, defense technology, and advanced military systems.
The cybersecurity sub-theme targets companies developing and managing security protocols that prevent attacks on systems, networks, computers, and infrastructure for local and national defense applications.
The defense technology sub-theme includes firms specializing in AI, the Internet of Things, augmented & virtual reality, human-machine collaboration, big data, specialized 3D light detecting and ranging, geospatial intelligence, and security scanning solutions.
The advanced military systems sub-theme covers firms engaged in robotics, drones, advanced weapon systems, military & naval munitions, defense-specific power and fuel systems, sensor arrays, processors, networking equipment, space launch, radar systems, and military vehicle production.
The index selects the largest eligible pure-play companies up to a maximum of 50 stocks. Constituents are weighted by float-adjusted market capitalization subject to a single stock cap of 8% and a cumulative cap of 40% for all components with weights above 5%.
The index is reconstituted and rebalanced semi-annually in May and November.
As of 13 September, the index contained 34 constituents with the most notable positions being General Dynamics (9.0%), BAE Systems (8.2%), Northrop Grumman (7.7%), Lockheed Martin (7.4%), Raytheon Technologies (6.9%), Palantir Technologies (5.9%), and Leidos (5.5%).