Advisors and investors paying close attention to European stocks and the related exchange traded funds (ETFs) since the start of last year know several things to be true.

First, there’s the obvious that once moribund European stocks are contributing mightily to the international equity renaissance. Second, the financial services and industrial sectors are significant contributors to the European bull thesis. Third, as it relates to the outlook for European industrials, much of it boils down to increased defense spending as NATO members outside the U.S. are committing to boost defense expenditures to at least 5% of GDP.

It’s not just European military expenditures that are increasing. So too is the number of ETFs dedicated to this theme. The Xtrackers Europe Defense Technologies ETF (XDEF) joined the party last week and it may be an example of a rookie ETF meriting closer examination.

Examining XDEF

Plenty of advisors and even the most ETF-enthused retail investors often express trepidation about new ETFs for no other reason than that the products are new. The merits of that line of thinking are debatable and worthy of a separate conversation.

Specific to XDEF, the ETF is only new in the U.S. because “equivalent Xtrackers ETF listings on major European stock exchanges last year, according to the issuer. What’s really important is what’s under the hood and how this infant ETF could generate upside.

To that end, the index matters. It always does. XDEF follows the STOXX Europe Total Market Defence, Space and Cybersecurity Innovation 50-25 Index, which as its name implies, isn’t an old guard aerospace and defense gauge. That may be a good thing.

“The underlying index captures the performance of companies with existing revenue and patent exposure to the three thematic segments — defense, space and cybersecurity — hence covering established suppliers of traditional military equipment and of more advanced defense systems, as well as those likely to play relevant roles in those fields in the future,” notes DWS. “Specialized innovators are pivotal in the advancement and evolution of the defense, space, and cybersecurity sectors at a time when the European Union is directing investments towards the modernization of the region’s security capabilities.”

A Fresh Spin on European Industrials

The NASDAQ-listed XDEF holds 28 stocks, nearly 94% of which hail from the industrial sector. So to a degree, this new ETF is a high conviction strategy, but that may be to the liking of some investors that are looking to capitalize on rising European defense spending.

In fact, XDEF’s is potentially all the more alluring when accounting for the fact that many of the low-cost, pure-beta ETFs so many market participants use as avenues to Europe are broad funds, meaning they’re not adequately tethered to the defense spending theme.

This new ETF charges 0.35% per year, which is fair among international thematic strategies.

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