New Canadian ETF to focus on defense technology as interest grows within the sector
A dramatic shift in the geopolitical world order has spurred governments across the globe to drastically increase military spending, a development which has sent defense stocks soaring as other sectors tumble in a highly volatile market.
This global trend towards militarization has been a key driver behind Global X’s Canadian SHLD ETF, launched on April 30, a defense tech fund it says will mirror its American counterpart.
While the firm had been looking to create a Canadian defense ETF for some time, the shifting geopolitical tides have made its release even more appealing, according to Chris McHaney, Head of Investment Management and Strategy at Global X.
“Obviously, defense spending has very unique drivers in terms of performance. So it was an area that always interested us, and we were planning on bringing that to Canada,” he said. “Given the first 100 days of the US presidency and the emphasis on defense spending around the world, we think it's a very timely launch.”
The SHLD ETF has a primary focus on defense technology according to McHaney, who identifies Palantir Technologies and Rheinmetall AG – whose stock has ballooned from 755 Euros at the start of February to its current price of just under 1,500 Euros – as examples of stocks the company has identified for the ETF. He says that a common issue with defense stocks is that companies often engage in operations away from of defense, leaving investors exposed to outside markets they had not bargained for. This has prompted Global X to adopt a pure play strategy according to McHaney, who says the company has seen the same issues occur in the tech sector where overdiversified exposure negatively impacted investors.
“What we're trying to bring to the market is; if you want to invest in defense, make sure that's you know what you're getting, not just a couple of stocks that are in defense, but also allocated in many other areas,” he said. “Trying to hone in to that pure play exposure so that you're not doubling up your exposures from elsewhere in your portfolio is one of the primary things.”
As governments across the world ramp up on defense spending, McHaney does warn that there is a risk of defense stocks becoming overvalued. But he adds that the stocks are designed to be held for long periods of time, giving the sector some defensive qualities that other equity investments may not carry.
“It's hard to say they're defensive overall because it is a popular theme. There is that possibility that a rush into the theme bids up the valuations of some of these companies,” he said. “It’s a more thematic type of exposure that is a bit longer term in nature, so you would hope investors, carry that out for the long term.”
Germany has recently lifted its notorious debt cap to increase defense spending, an unprecedented move for a country that has not rearmed since the end of the Second World War. The departure from Germany’s strict fiscal policy could see the country spend over $100 billion USD on their military, offering the defense sector serious tailwinds into the future, says McHaney.
Both newly elected Prime Minister Mark Carney and Conservative candidate Pierre Poilievre promised along the campaign trail to bolster a Canadian military that most experts agree has been wildly underfunded for decades. He also points to other countries across the globe such as Japan that are looking to bolster their military as a new geopolitical order takes shape in response to the Trump administration’s retreat from NATO.
“There’s a recognition within Canada that … the world, to some degree, is shifting to every country for themselves. And you know, even our allies that we've had many decades of peaceful relations with are somewhat threatening our sovereignty,” he said. “There's a shift in Canada as well to say that we need some of this spending to happen.”
Carney has already outlined his intentions of creating stronger economic and security ties with Europe, showcased by his diplomatic trips to the UK and France in March, the first foreign trip the former banker made as Prime Minister. McHaney expects Carney to continue building relations with Canada’s allies across the pond, a theme that he says will not only help Canada diversify from now-unreliable American military protection, but also push past its reliance on the US as a trading partner to soften the blow of Trump’s economically devastating tariff policy on Canada’s manufacturing sector.
“For so many years, you know, when we talk about Canadian economic growth and Canadian economic activity, we've always been so tied to the US … being able to diversify that exposure and that risk will help Canada in the long run,” he said. “Canada does have manufacturing prowess, a pretty highly skilled workforce, particularly in Ontario. A lot of those exports go to the US right now, to the extent those industries get hurt from US trade. Perhaps more domestic spending and relations with Europe and others could help fill some of that gap.”
