Defence Tech ETFs, Hypersonic Missile Technologies and the End of the Peace Dividend

Defence tech ETFs are on the rise following increasing global instability, the switch of government spending from economic growth to national security, and the focus on emerging technologies in defence and warfare.

One of the technologies that are on the rise is hypersonic missile technology, with for example, Lockheed Martin recently securing a $756 million contract from the US Army.

These are all effects of the end of an era called the Peace Dividend. This era lasted from the end of the Cold War until Russia invaded Ukraine with spending focused on economic growth instead of national security.

The Big Story

Defence Tech as a Disruptive Investment Theme

This week, defence technology was chosen as the “Disruptive Theme of the Week” at Nasdaq.

The rising global instability has triggered a change in spending from economic growth to national security at the same time as emerging technologies are increasingly being introduced to defence and warfare. In 2023, global military expenditures saw a record high of $2.44 trillion, the sharpest year-over-year rise since 2009, with Europe having the fastest acceleration of spending.

This change has triggered a rise in defence-themed ETFs. The top performer among non-levered defence ETFs is Global X Defence Tech ETF which holds defence tech names such as Palantir alongside traditional defence and aerospace companies. The ETF is up 22.2% YTD and has gained $164 million in assets since its launch on September 11, 2023.

*Source: SIPRI Military Expenditure Database, April 2024*

Europe’s escalation in spending is also reflected in the ETFs. Two very successful European UCITS ETFs are VanEck Defense ETF, which has raised over $750 million since its launch on March 31, 2023, and the HAN Future of Defence UCITS ETF, which launched on July 4, 2023, with more than $380 million in asset flows.

The European ETFs have ESG screening, something that is completely new to this category. Before the Russia-Ukraine conflict, institutional investors had traditionally avoided the defence sector due to ESG concerns. But the war has changed the perception, and given the success of ESG-screened ETFs in Europe, it is likely that US versions of these products will emerge.

Another interesting theme is space defence, with the example of the Procure Space ETF FUFOI. Space has become a contested domain, and last year, government space budgets reached an all-time combined high of $117 billion, roughly half of which were defence expenditures.

A Brief Guide to Hypersonic Missile Technology

Hypersonic missiles are a cutting-edge military technology that combines five times the speed of sound, manoeuvrability, and low radar detection.

What differentiates today’s hypersonic weapons from ballistic missiles is the aerodynamic lift that allows reentry vehicles to manoeuvre under guided flight within the atmosphere. While ballistic missiles follow a parabolic trajectory to their target, hypersonic missiles can reenter the atmosphere much quicker. After reentry, the hypersonic missiles are guided to their target with the ability to undertake evasive manoeuvres to overcome defences.

There are two main types of hypersonic missiles:

Hypersonic Glide Vehicles (HGVs) are mounted on rocket boosters similar to intercontinental ballistic missiles. They can be accelerated to speeds of Mach 20 or more and glide unpowered in the upper atmosphere before diving towards the target. They are highly manoeuvrable, making them difficult to intercept.

Hypersonic Cruise Missiles (HCMs) fly at lower altitudes and are powered throughout their flight, typically using ramjet or scramjet engines to achieve hypersonic speeds. The HCMs require
initial acceleration from a rocket booster or jet engine to reach operational speeds and can reach speeds up to Mach 10 or more.

While the technology is expensive and technically demanding to develop, it’s seen as crucial to have by the largest militaries in the current global arms race.

The US, China, Russia, North Korea, India, Australia, France, Germany, Japan, Iran, Israel, and South Korea are some of the countries currently developing or deploying hypersonic missiles.

In May, the US Army awarded Lockheed Martin a $756 million contract to deliver additional capability for the nation’s ground-based hypersonic weapon system, the Long Range Hypersonic Weapon.

In the News

Retired U.S. Navy Admiral Charged in Bribery Scheme with Tech CEOs for $500,000 Salary

Retired Navy Admiral Robert Burke has been arrested for allegedly engaging in a bribery scheme with tech CEOs Yongchul “Charlie” Kim and Meghan Messenger of Next Jump. Burke is accused of using his high-ranking status to secure military contracts for Next Jump in exchange for a lucrative job offer. From 2020 to 2022, Burke reportedly helped Next Jump win hundreds of thousands of dollars in military contracts, later joining the company as a senior partner with a $500,000 annual salary and stock options. Burke denies the charges and plans to plead not guilty.
Read more at NBC.

Berlin, Paris Plan to Strengthen European Defence Capabilities

Germany and France have announced plans to enhance European defence capabilities in response to changing security dynamics. This initiative aims to position the European Union as a significant geopolitical entity capable of addressing contemporary security challenges. The joint effort underscores the commitment of both nations to bolster the EU’s role in maintaining international order and security.
Read more at Yahoo News.

Taiwan to Set Up Military Technology Unit

Taiwan plans to establish a military technology development unit to integrate research on military and civilian defence technology. This initiative aims to enhance Taiwan’s asymmetrical warfare capabilities amid rising threats from China. The new unit, modelled after the US Defense Innovation Unit, will combine resources from the Chungshan Institute of Science and Technology and civilian technology firms. The focus will be on investing in mature defence technologies, such as next-generation unmanned aerial and naval vehicles, to maintain Taiwan’s edge in defence.
Read more at Taipei Times.

Nigeria’s Digital Peacebuilding Ecosystem

Nigeria is developing a digital peacebuilding ecosystem to combat conflicts and promote stability. Leveraging technology, this initiative aims to address the root causes of violence and foster a more peaceful society through digital tools and platforms. The effort focuses on integrating data-driven approaches to track conflict trends, enhance communication among peacebuilding stakeholders, and provide timely interventions to prevent escalation.
Read more at Peace Direct.

Japan and the US Fast-Track Hypersonic Defence Tech Amid Tensions

Amid rising tensions in the Asia-Pacific region, Japan and the United States are accelerating their efforts to develop hypersonic defence technology. This collaboration aims to counter threats from China and North Korea by enhancing missile defence systems. The joint initiative focuses on integrating advanced technologies to detect, track, and intercept hypersonic missiles, thereby strengthening the security posture of both nations.
Read more at Airforce Technology.

Saab Gets Order For Defence Systems And Equipment

Saab has secured an order valued at approximately 7.7 billion Swedish kronor from a Western government for various defence systems and equipment. This significant order, with deliveries planned for 2027 and 2028, underscores Saab’s robust capabilities in defence technology. The order includes systems from Saab’s Dynamics and Surveillance business areas, although specific details and the customer’s identity remain undisclosed due to national security considerations.
Read more at Nasdaq.