When it comes to global defense spending, the “big three” are the U.S., Russia and China. That’s unlikely to change. However, amid various global hot conflicts, more countries are boosting their defense budgets — increases that introduce interesting investment implications. For example, Japan, which has already been raising its defense spending, recently signaled that it could spend up to 3.5% of GDP on defense. That could compel investors to examine ETFs such as the WisdomTree Japan Opportunities Fund (OPPJ) and the WisdomTree Asia Defense Fund (WDAF).
WDAF, the more geographically diverse of this pair of ETFs, allocates 14.58% of its portfolio to Japanese stocks. South Korea is WDAF’s largest country weight, at nearly 44%. That’s noteworthy because that country already issued a 3.5% of GDP defense spending commitment.
Quality Over Quantity
Of note to investors considering OPPJ or WDAF are comments from Japanese Defense Ministry Press Secretary Kimihito Aguin. He implied that the country’s defense expenditure plans, previously articulated to the White House, aren’t about fulfilling arbitrary spending targets. Rather, the plan is to be intentional and thoughtful in terms of where capital is allocated.
“Japan’s defense buildup is something we undertake based on our own independent judgment, under the fundamental principle that we must defend our own country ourselves,” Aguin said at a Tuesday press event. “It is also not a matter of starting with a predetermined spending figure. What matters is the substance of our defense capabilities.”
Indeed, Japan has recently shown a knack for making good on defense spending pledges. For the fiscal year that ended in March, the country spent 2% of GDP on defense.
“Until 2022, Japan had an informal cap on defense spending around 1% of GDP, an indication of how quickly thinking on defense has changed in recent years. A new five-year defense spending plan is expected at the end of this year,” reported Alastair Gale for Bloomberg.
As an Asian-focused defense ETF, WDAF is clearly tethered to themes of elevated military spending in Japan. The same is true of OPPJ; that WisdomTree ETF devotes 47.41% of its weight to industrial stocks, more than triple its second-largest sector exposure.
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