HANetf head of research, Tom Bailey, talked with Proactive about the reclassification of the Future of European Defence UCITS ETF (ARMY) under Article 8 of the EU SFDR regulation. The ETF is undergoing an index change that will shift its holdings to a screened version of the current index, incorporating more responsibility-focused criteria.
Bailey explained that the updated index will consist exclusively of companies based in European NATO member countries, with a zero-tolerance policy on controversial weapons like cluster munitions and anti-personnel mines. This change is intended to enhance the ETF’s alignment with Europe’s industrial and defence objectives while meeting the regulatory requirements of stricter markets such as Italy and the Netherlands.
Currently, no defence-focused ETF exceeds an Article 6 classification. Bailey noted, “Once this index change takes effect and our ETF is reclassified as Article 8, then it'll be the only defence ETF with this Article weight classification.”
The move opens the ETF to a broader pool of institutional investors across Europe who are restricted to Article 8 or higher products. HANetf expects this strategic update to increase accessibility and relevance amid growing demand for both defence exposure and responsible investing.
Proactive: Tom, very good to speak with you. Could you tell us what's changing with the Future of European Defence UCITS ETF, or ARMY?
Tom Bailey: Sure. So the ETF is switching to a different index. So it's going to track a screened version essentially of the index it currently uses. And this will essentially allow the ETF to be classified under the EU’s SFDR classification as Article 8. So it's about really adding a few more of the kind of responsibility screens.
And so the new index will only have European companies in now, and only European NATO members as well. And then also that would kind of strengthen the fund's alignment with Europe's industrial base and broader re-armament. At the same time, the new index will have zero tolerance for what are called controversial weapons. So these are those who may be producing stuff like cluster munitions, anti-personnel mines, etc.
So zero tolerance for any of that in a company's portfolio products. And so it's about keeping this as a kind of pure-play European defence ETF, but with a bit more focus on this responsibility screening, which investors, particularly on the continent, are very keen for.
Proactive: Why is HANetf making this change now, Tom?
Tom Bailey: Sure. So, currently, if you take the SFDR classification, which is an EU thing, but I think a lot of investors in the UK sort of look to it, you have Article 6, Article 8 and Article 9, with Article 9 being the highest ranking, Article 8 being second, and Article 6 the third.
Currently, there are no defence ETFs which rank any higher than Article 6. So once this index change takes effect and our ETF is reclassified as Article 8, then it’ll be the only defence ETF with this Article weight classification. And that's very important for some markets such as Italy and the Netherlands, which have very strict regulatory limits on what kind of defence items they can have exposure to.
But also, we think it will make the ETF potentially appeal to a broader range of investors who do have those restrictions. You find some portfolio managers in Europe who will have, say, a mandate where they can only buy Article 8 and up funds. So by making ARMY Article 8, we think we broaden that appeal and really tap into what we think is a growing kind of desire to align, essentially investing in defence and these kinds of responsibility standards around SFDR, etc.
Because if you kind of think about that, a few years ago, people didn't think defence and responsible investing were compatible. Obviously, defence companies produce a range of different weapons. But given the geopolitical climate and what we've seen in terms of the need for Europe to have a well-capitalised defence sector in order to provide the security that Europe needs today, we think there's more of this idea of convergence — trying to access defence in this responsible way.
Proactive: So what does this mean for investors and for Europe's defence sector?
Tom Bailey: Sure. So investors essentially would just get a tool which allows them to have a more responsible way to invest in defence, which is obviously under increased demand right now. And it’s about aligning with NATO, the European NATO’s broader rebuild of its traditional defence equipment. It ensures that the investors who might have those strict requirements — even self-imposed or mandate-imposed — aren’t missing out on the defence theme.
We've been doing defence ETFs now since 2023. We've got three focused defence ETFs. We've got defence in a multi-thematic ETF. So we're always looking at how we can provide innovation in how we deliver that ability for investors to access the defence stream through the ETF wrapper.
Proactive: Tom, as usual, a pleasure speaking to you. Thank you very much for taking the time.