Defense Spending Could Keep Momentum on This ETF's Side

Increased European defense spending, driven by geopolitical shifts and a NATO commitment to allocate 5% of GDP for defense over the next decade, is expected to bolster economic growth and sustain the momentum factor in international equities. The Invesco S&P International Developed Momentum ETF (IDMO), which has attracted $1 billion this year and holds significant exposure to European nations like Germany and the UK, is positioned to benefit, with its top holding, Rolls-Royce Holdings, serving both European and U.S. defense industries.

Analysis

A significant geopolitical catalyst is driving a momentum theme in international equities, centered on increased European defense spending. Following a period of underinvestment noted by Goldman Sachs, NATO members have now committed to allocating 5% of their GDP to defense over the next decade, a move accelerated by the Russia/Ukraine conflict and a shifting U.S. political stance on NATO involvement. This governmental spending is expected to provide a net positive effect on European economic growth, directly benefiting funds like the Invesco S&P International Developed Momentum ETF (IDMO). The ETF has already seen significant inflows, gathering $1 billion in assets this year, and is strategically positioned with substantial country allocations to the United Kingdom (16.68%) and Germany (15%). Its top holding, Rolls-Royce Holdings (3.64% of the fund), exemplifies the investment thesis by not only having a strong foothold in the European defense industry but also serving as a key supplier to major U.S. defense contractors and airlines, thereby capturing growth from both domestic U.S. and ramping European defense budgets.

Key Decisions for Investors

• Investors seeking exposure to the European re-armament theme should consider the Invesco S&P International Developed Momentum ETF (IDMO) as a vehicle to capitalize on sustained defense spending and its positive spillover effects on European economies.
• A deeper analysis of IDMO's key holdings, particularly Rolls-Royce (RYCEY), is warranted for those looking for a more concentrated single-stock play with diversified revenue streams from both European and U.S. defense markets.
• Monitor progress on NATO members' 5% GDP defense spending commitments and any changes in U.S. foreign policy, as these are fundamental drivers of the investment thesis and could impact the long-term momentum of the underlying assets.