With the government increasingly focusing on national security and military strength, the defence expenditure of India has reached record levels in recent years. There are new opportunities for growth in the defence sector, driven by rising investments in defence modernisation, domestic manufacturing and exports.
From the investor’s perspective, Defence ETFs are an easy option to gain exposure to this growth narrative without the need to pick individual stocks. Nevertheless, selecting the right Defence ETF involves more than just considering past performance. It is also crucial to understand the risks and structure of the fund. Let us explore how one can select the right defence ETF through this blog.
Why defence ETFs are gaining attention
The Indian defence industry is gaining from increased budgets and government support for the long term. Initiatives like Atmanirbhar Bharat are promoting domestic production and discouraging import dependence.
Meanwhile, private industry is increasingly involved in defence manufacturing, technology and aerospace. This has broadened the investment field beyond conventional public companies.
Defence ETFs are becoming more and more popular because they are diversified across a range of companies. They also enable to lower stock-specific risk and provide participation in the defence theme within a single investment.
Key factors to check before choosing a defence ETF
Here are factors to consider when investing in defence ETFs.
Look at the ETF’s underlying index
Understanding the index being tracked is the first step. Verify the portfolio and analyse which defence, aerospace, and related companies are part of the portfolio.
Some indices are limited to purely defence businesses, and others may cover industrial and engineering companies along with defence. This may impact the risk and return profile of the ETF.
Review portfolio concentration
Examine the distribution of weight to the largest holdings. An ETF that has a few companies dominating the portfolio may be more susceptible to the movements of those companies. Risk can be spread across several companies in the sector with a balanced portfolio.
Evaluate assets under management (AUM)
AUM is the sum value of assets which the ETF manages. The larger AUM typically signifies greater levels of fund stability and better investor participation. A high AUM doesn’t always mean higher returns, but it can suggest wider market acceptance.
Check liquidity and trading volume
Liquidity is relevant because it determines the ease with which an investor can trade ETF units on the exchange.
When trading volumes are higher, they lead to lower bid-ask spreads. This helps lower transaction costs.
Compare expense ratios
The annual fee that’s paid to manage the ETF is called the expense ratio. Little differences in costs can even have a major impact across long periods of investment.
For instance, when investors compare ETFs like Groww Nifty India Defence ETF and Motilal Oswal Nifty India Defence ETF, they ought to look at costs besides portfolio composition, liquidity, and tracking efficiency and not just focus on returns.
Who should consider a defence ETF?
Investors looking for exposure to a high-growth thematic sector associated with government spending and industrial development could find Defence ETFs appropriate.
Instead of replacing core equity investments, they can be used as a satellite allocation within a diversified portfolio.
ETFs, as such, are more appropriate for investors with medium to long-term investment time horizons. One should, however, evaluate his or her risk tolerance and financial objectives before making an investment.
Bottom line
Defence ETFs are a great opportunity for investors to tap into the growing defence sector in India. Nevertheless, before investing, investors are advised to thoroughly examine the index composition, portfolio concentration, liquidity, expenses, and risks.
With a well-selected Defence ETF, investors can gain exposure to the long-term growth of the sector while keeping their risk management approach disciplined.
