Rehabilitation of the Armaments Industry is Progressing Rapidly How Defense Stocks Became Investable for the ETF Industry
In the past, defense stocks were typically considered uninvestable. Today, there are large-scale defense ETFs. Martijn Rozemuller, CEO of VanEck Europe, explains how this change in thinking came about. He is also convinced that screening with exclusions will become the industry standard in the coming years — and has set his sights on making VanEck one of the top 10 providers in Europe.
A quarter of a century ago, Exchange Traded Funds (ETFs) were first listed on the SIX Swiss Exchange, marking the beginning of the rise of passive investing. For the first time, private investors in Switzerland (previously mostly limited to the U.S.) had access to simple, low-cost, and freely tradable instruments. Today, ETFs are an indispensable part of the investment landscape.
VanEck, the globally active asset manager and ETF provider founded in 1955 and still owned by the Dutch Van Eck family, has been present in Switzerland with ETFs for ten years. In terms of ETF assets under management, the firm ranks 12th globally. finews.com recently attended VanEck’s “Ring the Bell” ceremony at SIX and used the occasion to speak with Martijn Rozemuller, CEO of VanEck Europe. Rozemuller founded his own ETF firm in 2008, which he sold to VanEck in 2018, becoming head of the company’s European operations.
First Provider of a Defense-Focused ETF in Europe
“We’re currently number 12 in Europe and aim to break into the top 10,” Rozemuller states clearly from the outset. “That goal is realistic, as our net inflows are above average and the rankings are tight.”
Two and a half years ago, VanEck was the first provider in Europe to launch a so-called Defense ETF — an ETF that invests exclusively in stocks of companies from the defense industry. Today, this ETF has grown to USD 5,8 billion in assets, making it the largest of its kind globally.
“I Feel Comfortable with This Product”
Until just a few years ago, the prevailing consensus held that defense companies were inherently unsustainable and should have no place in retail-oriented ETFs. Admittedly, there were always some grey areas — for example, in the case of dual-use manufacturers or companies with small defense divisions.
“I feel very comfortable with this particular product and am happy to talk about how it came about,” Rozemuller explains. The initial idea was sparked by retail investors who, following Russia’s invasion of Ukraine in 2022, began asking why no defense ETF existed. “I used to respond that it was difficult — due to ESG criteria, our reputation, and banks that simply refused to distribute such products.”
Retail Investors Triggered the Shift
But then, a shift in mindset began. Rozemuller puts it provocatively: “How socially responsible is it, in terms of the ‘S’ in ESG, to abandon Ukraine and deny it the means to defend itself?” Suddenly, defense funding became a topic on the Dutch government’s agenda (Rozemuller participated in the debate), and at the EU level, defense emerged as a geopolitical priority. While criticism hasn’t disappeared, it has become noticeably quieter.
“We found a solution together with an index provider that excludes controversial weapons but still offers sufficient diversification.” The fact that the ETF doesn’t meet ESG criteria hasn’t hurt its success — defense stocks have rarely been more popular on the markets. In recent months, increasing numbers of institutional investors have climbed aboard. “Retail investors were first, as they face fewer regulatory hurdles and can act quickly,” Rozemuller explains.
Screening Instead of ESG Labels
Ironically, increasingly stringent ESG regulation helped as well. These rules now demand a measurable impact and clear purpose from sustainable financial products. As a result, many ETF and fund providers have dropped the explicit ESG label, but still uphold sustainability by screening portfolios (often via external agencies) and excluding the worst offenders.
“Screening will become the industry standard within a few years,” Rozemuller predicts. “We don’t want to overpromise when it comes to sustainability — only promise what our ETFs can realistically deliver.” So-called “dark green” products that still carry the ESG label often have the downside of being overly restrictive due to tight selection criteria, especially with regard to data availability. Adding to the complexity is the lack of consistent ESG scoring: the same company may be rated ESG-compliant by one agency and non-compliant by another.
Pioneering in Crypto Investments
VanEck has also been a pioneer in a completely different space. “We were the first traditional asset manager in Europe to launch a crypto product,” Rozemuller confirms. Discussions began in 2016/2017, but regulation proved challenging — particularly in the U.S., where the SEC was long skeptical, whereas Switzerland’s Finma was “open and constructive.”
Today, VanEck offers 15 crypto ETPs with assets totaling USD 1.5 billion. Rozemuller: “We’ve always been among the first to identify trends. Right after our founding, VanEck launched a fund on international equities — at a time when only U.S. equities were common. Not long after, even before the collapse of Bretton Woods, we introduced a gold fund.”
Diversification Within the Crypto Allocation
Naturally, Rozemuller is no crypto skeptic and sees continued growth potential, but he doesn’t pit innovation against traditional investing. “Given the benefits of diversification, an allocation of 2 to 3 percent is not unreasonable — and even within that crypto share, diversification is crucial.”
As with tech and internet stocks in earlier times, many crypto projects will likely fail. “But you have to be in the game — because among them are those that, twenty years from now, will be as indispensable to a portfolio as Alphabet or Apple are today.” Distributed ledger and blockchain technology may even transform the ETF business itself. “ETFs could become even cheaper and more efficient if tokenized.”
Unlike most other providers, VanEck is also unique in how it handles the custody of its crypto assets. “We’re the only provider in Europe that entrusts a bank with the safekeeping of the underlying assets. The keys are stored in a vault at Bank Frick in Liechtenstein — we don’t have access to them ourselves.”
Only Physical Replication, No Securities Lending
Rozemuller also takes a unique stance on another controversial issue from the early days of ETFs in Switzerland. “Even back in 2008, it was clear to me that only physical replication — actually holding the underlying assets — made sense.” At the time, synthetic replication using derivatives like swaps was still quite common. But in line with the motto “keep it simple,” VanEck has consistently avoided synthetic replication and the counterparty risks it entails.
“We’re also the only provider in Europe that doesn’t engage in securities lending. Why should I help someone bet against our own ETF clients?” While Rozemuller acknowledges that the risks associated with synthetic replication and securities lending are minimal under normal conditions, he prioritizes another principle over a small additional yield: “Better safe than sorry.”
