Talking Heads - ETF investing in European defence

George, let's start by reviewing performance of the European defence sector.

Have developments over the last year kept pace with expectations? I think

since the start of the year, we've seen defense shares actually dip a bit.

In both Europe and the U.S., there was some conjecture in the investment community that we'd hit peak defense, that defense budgets were rising in Europe, rising in the U.S., and maybe this is really as good as it gets.

In recent months, it's lagged a bit, although I would say since then, we've seen continued geopolitical unrest increase.

I think that reminds everyone this is really a long-term investment opportunity because, one, the world is not becoming safer, and two, there's a heavy amount of investment that needs to occur in Europe.

especially in a world where the US might be distracted, engaged in other parts of the world.

So I think the opportunity is still there, even though we've seen some of the share prices come down since the beginning of the year.

We always knew this investment in defense were common fits and starts.

It's typically a heavy industrial business.

Heavy industrial businesses take time to invest in CapEx so you can build the product that you're being contracted to build, to collect an order from your biggest customer, which is typically a government.

Sometimes they don't move as fast as investors would be used to or like.

Those are some of the items that have slowed progress, receiving contracts, building product, and seeing the increased revenues and profits.

So things have come off a little bit since the beginning of the year.

Some of the reasons why are understandable and short-term in nature.

I think this is really a long-term requirement for Europe to invest in defense and therefore a long-term opportunity.

And as you say, there has been absolutely no let-up in geopolitical tensions.

If anything, there's been a heightening.

And as a result, the commitments by European governments to strengthen their independent defence capability have been continuous.

And there's been no doubt that it's now up to Europe to reinforce its defence capability.

Do you think that the valuations now accurately reflect the outlook at the moment and the fact that this is a long-term opportunity?

Yeah, so when we saw some of this decline in the share price recently, some of the valuations have come nicely in line with their U.S. counterparts.

So I would say the valuations look appropriate for the industry that has a long-term opportunity to build defense equipment I think people, investors, even citizens don't always understand that governments are going to have to set aside a certain level of budget.

We're looking for three and a half percent of budget out of the European countries to build their defense establishments up.

And this is something that has to happen every year into perpetuity, right? It's not a short-term event where you buy all this equipment, put it in warehouses, and then you don't use it, you don't train with it, and you don't need to replace it for 20 or 30 years.