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VEU ETF: A Beneficiary Of European Defense Spending (NYSEARCA:VEU)
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Published in Science and Technology on Saturday, July 26th 2025 at 4:07 GMT by Seeking Alpha🞛 This publication is a summary or evaluation of another publication 🞛 This publication contains editorial commentary or bias from the source
Vanguard FTSE All-World ex-US Index Fund ETF Shares gains global diversification with a 0.04% expense ratio. See more on VEU ETF here.
VEU ETF Poised to Gain from Surging European Defense Spending
In the ever-evolving landscape of global investments, exchange-traded funds (ETFs) like the Vanguard FTSE All-World ex-US ETF (VEU) offer investors a diversified gateway to international markets outside the United States. This ETF, which tracks the FTSE All-World ex-US Index, provides exposure to a broad array of developed and emerging market equities, spanning regions from Europe to Asia and beyond. With assets under management in the billions, VEU has long been a staple for those seeking to balance their portfolios with non-U.S. holdings. However, recent geopolitical shifts, particularly the escalation of defense spending across Europe, position VEU as a potential beneficiary in ways that merit closer examination. As European nations ramp up military budgets in response to ongoing conflicts and security threats, the ripple effects could boost certain holdings within VEU, driving performance and offering investors an indirect play on the defense sector without the need for targeted, high-risk bets on individual stocks.
To understand why VEU stands to gain, it's essential to delve into the current state of European defense spending. The invasion of Ukraine by Russia in early 2022 served as a wake-up call for many European countries, prompting a reevaluation of military preparedness. NATO allies, long criticized for underinvesting in defense, have committed to increasing expenditures to meet or exceed the alliance's 2% of GDP target. Germany, for instance, announced a historic €100 billion special fund for its armed forces, marking a dramatic shift from its post-World War II pacifist stance. Similarly, countries like Poland, Sweden, and the Baltic states are accelerating procurements of weapons, vehicles, and technology. This surge isn't just rhetorical; it's translating into real economic activity. According to various reports, European defense budgets could rise by hundreds of billions over the next decade, fueling demand for everything from fighter jets and tanks to cybersecurity systems and munitions.
VEU's portfolio is well-positioned to capture this upside due to its significant allocation to European equities. As of the latest data, Europe accounts for a substantial portion of the ETF's holdings—around 40-50% depending on market fluctuations—with key exposures in the United Kingdom, Germany, France, and Switzerland. Within this, industrial and aerospace sectors feature prominently, including companies directly involved in defense manufacturing. Take BAE Systems, a British multinational defense, security, and aerospace company, which is a notable holding in VEU. BAE has seen its order book swell with contracts for submarines, aircraft, and electronic warfare systems, driven by heightened demand from the UK and its allies. Shares of BAE have performed strongly in recent years, reflecting investor confidence in sustained defense spending.
Another standout is Germany's Rheinmetall AG, a major player in armored vehicles and ammunition. Rheinmetall has benefited immensely from orders related to the Ukraine conflict, including Leopard tanks and artillery shells. The company's revenue has surged, and its inclusion in VEU provides the ETF with a direct link to this growth story. France's Thales Group, specializing in avionics, radar, and defense electronics, is yet another holding that could see tailwinds. Thales has secured deals for advanced missile systems and surveillance technology, aligning with Europe's push for technological superiority in defense. Even non-European holdings in VEU, such as those in South Korea or Japan, might indirectly benefit if global supply chains for defense components expand, but the European focus remains the core driver here.
Beyond individual companies, the broader sectoral dynamics within VEU amplify its potential. The ETF's industrials sector, which includes aerospace and defense, constitutes a meaningful slice of its overall composition—often around 10-15%. This sector has historically underperformed during peacetime but thrives amid geopolitical tensions. The current environment, characterized by Russia's aggression and concerns over China's assertiveness in the Asia-Pacific, creates a fertile ground for sustained investment. Analysts project that European defense spending could grow at a compound annual rate of 5-7% through 2030, outpacing general economic growth. This isn't just about immediate contracts; it's about long-term infrastructure buildouts, research and development, and modernization programs that will support these companies for years.
Of course, VEU's appeal extends beyond defense. As a low-cost ETF with an expense ratio typically under 0.10%, it offers broad diversification across thousands of stocks, mitigating risks associated with any single sector or region. Its top holdings include global giants like Taiwan Semiconductor Manufacturing Company (TSMC) in Asia and Nestlé in Europe, providing balance against defense-specific volatility. Performance-wise, VEU has shown resilience, often tracking global market trends while offering dividend yields that appeal to income-focused investors. In the context of rising interest rates and economic uncertainty, its international exposure can serve as a hedge against U.S.-centric risks, such as inflation or domestic policy shifts.
That said, no investment is without caveats, and VEU's linkage to European defense spending introduces specific considerations. Geopolitical risks remain high; any de-escalation in Ukraine or a shift in political will could temper spending enthusiasm. For example, upcoming elections in key European countries might lead to budget reallocations away from defense toward social programs. Currency fluctuations also play a role—VEU is unhedged, meaning a strengthening U.S. dollar could erode returns from euro-denominated holdings. Moreover, while defense stocks have rallied, they often trade at premium valuations, raising questions about sustainability. Rheinmetall, for instance, has seen its price-to-earnings ratio climb significantly, prompting some to warn of overvaluation.
Comparatively, investors eyeing pure-play defense exposure might consider U.S.-focused ETFs like the iShares U.S. Aerospace & Defense ETF (ITA), which includes heavyweights like Lockheed Martin and Raytheon. However, VEU offers a more global, diversified approach, potentially capturing upside from non-U.S. defense firms that are ramping up production. This is particularly relevant as European companies increasingly collaborate with U.S. counterparts through NATO frameworks, creating synergies that could benefit cross-border holdings.
Looking ahead, the trajectory of European defense spending appears robust. Initiatives like the European Union's Permanent Structured Cooperation (PESCO) and the European Defence Fund are channeling billions into joint projects, fostering innovation and efficiency. This could lead to a renaissance for Europe's defense industry, long overshadowed by American dominance. For VEU investors, this translates to potential capital appreciation and dividend growth from affected holdings. In a broader sense, it underscores the ETF's role in capturing thematic trends—be it defense, technology, or sustainability—without the need for active stock-picking.
In conclusion, while VEU is not exclusively a defense ETF, its substantial European exposure positions it as a subtle yet effective beneficiary of the continent's military spending boom. As investors navigate a world of heightened uncertainty, incorporating such diversified vehicles can provide both growth potential and risk mitigation. Whether you're a long-term holder or considering tactical allocations, VEU's alignment with this macro trend warrants attention. With global markets interconnected as never before, the defense spending surge in Europe isn't just a regional story—it's a global opportunity embedded in funds like VEU, ready to be harnessed by savvy investors.
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