Lead-Lag Live

How Geopolitics and National Security Are Changing Tech Investing

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Aram Babikian, Head of Xtrackers Wealth at DWS, to explore how rising geopolitical tensions are reshaping technology investing and why national security has become a core investment lens.

From US–China decoupling and critical technologies to AI, quantum computing, and supply-chain risk, Babikian explains how investors can gain exposure to future-facing innovation while actively de-risking portfolios from geopolitical entanglements.

In this episode:
– What “critical technologies” mean for investors
– How US–China competition is changing capital flows
– Why geopolitical risk now matters in portfolio construction
– How the CRTC ETF screens for national security alignment
– Why some mega-cap tech names are excluded—and others included
– How to think about strategic tech as a core allocation

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#Geopolitics #NationalSecurity #AIInvesting #TechnologyStocks #ETFInvesting #MarketRisk #PortfolioStrategy #CriticalTechnologies

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SPEAKER_00:

You've seen a greater amount of distance being created between these two countries of the United States and China. So if you imagine and close your eyes that we built this bridge, but now it's starting to move further apart, what ends up happening? The middle of the bridge starts collapsing. And that's essentially that collateral damage that's going to occur. And that's what we're de-risking in the portfolio to prevent that risk from occurring with companies that are entangled with China.

SPEAKER_01:

Now, today we're going to talk about geopolitical backdrop and how it feels heavy right now. Uh, from rising tensions in trade, tech rivalry, energy security, and global strategic competition. It's clear investors can't treat markets as if they're divorced from politics anymore. In times like these, it pays to think about which sectors and companies stand to benefit from shifting global power dynamics and which could get squeezed. And that's why today's conversation really matters. We're going to look at uh one ETF, CRTC, that aims to offer different approaches for navigating, you know, both innovation and risk in the world. Uh CRTC focuses on companies supporting national security, critical technologies aimed at giving exposure to the cutting edge AI and big data innovation and what they mean for your portfolio. My guest today is Aram Babikian, head of X Tracker as Wealth at DWS. It's great to have you back, Aram.

SPEAKER_00:

Great to be back, Melanie.

SPEAKER_01:

So just to start, CRTC, it it claims to invest in companies seen as critical to US technologies and the allies and infrastructure. Can you walk us through what critical technologies are? And and for people who aren't familiar, why do those companies, what which companies qualify as as critical technologies?

SPEAKER_00:

So um loaded question, a lot to unpack there. So let me let me start with kind of taking a step back at the uh general premise of critical technologies, and then we can kind of uh dive a little bit deeper. But back in 2022, the DOD, now uh called the DOW, Department of War, came out with a list of, on a bipartisan level, of 14 critical technologies that they deemed as the future of technological dominance and economic viability, all under the guise of U.S. national security. This was in direct response to the China 2025 plan. And if you see what's going on right now from a geopolitical spectrum, you're looking at the greatest moment of competition that we've seen since the Cold War, um, where there is a sort of arms race, but not necessarily in the realm of defense missiles and things of that. But you are seeing that as well, don't get me wrong. But it really is more in other areas, such as artificial intelligence, quantum computing, and these critical technologies that are deemed um very necessary for the evolving landscape and future, which makes things kind of very interesting right now. So if we look at sort of the uh what happened back in the heydays of basketball, you had Larry Bird and Magic Johnson. And Larry Byrd and Magic Johnson really were incredibly competitive with one another, but there is an argument to be made that each of them together made each other better, if that makes sense. Where the immense competition that they had between one another increased their skill set tremendously. And you're sort of seeing that happen right now with the competition between China and the United States and in these areas of critical technologies. So, what are critical technologies? There were 14 of them, and they actually got rolled up into six. So the 14 of them that are in the realm of critical technologies are biotech, uh, wireless technology, quantum science, advanced materials, trusted AI, microelectronics, energy resilience, uh, human integrated uh networks, space technology, advanced computing software, uh, human machine interfaces, directed energy, hypersonics, and integrated sensing and cyber. Now, to make it easier and more streamlined, the Department of War came out and rolled those up into six. So those six essentially are applied artificial intelligence, AAI, biomanufacturing, bio, uh, contested logistics technologies, LOG, uh, quantum and battlefield information dominance, qubit, uh scaled hypersonics, shy, and then scaled directed energy, SCAD. So these are uh, and the reason they got rolled up was in order to streamline the process when it comes to moving through funding. So these critical technologies are going to be beneficiaries of mass investment by the U.S. government. You're already seeing that happen um this year with certain companies. Uh they're consistently uh being touted for their technologies and how they're dealing with China. But also, you saw JP Morgan, for example, come out with a uh massive fund that's going to be investing in these technologies and infrastructure. And that doesn't seem to be stopping, especially when you consider the way geopolitics is aligned right now. And the number one uh strategy seems to be US national security.

SPEAKER_01:

So I like the analogy you just gave about the basketball players, but I want to talk for a minute about CRTC's uh top holdings, which include names like Alphabet, Amazon, Microsoft, Nvidia, Meta, et cetera. So what differentiates them then, those big names, from uh other regular growth or tech heavy funds? And given that overlap, what makes uh CRTC unique?

SPEAKER_00:

There's two things, right? So you have first the overlay of critical technologies. So we start with a uh universe of nearly 1,500 names and you whittle down to 220 names by screening through critical technologies. And then we have another screen called a geostrategic risk rating. So first they need to align with critical technology. So if you look at um, you know, in this universe that we're going off of, for example, JP Morgan is one of the top um areas, but it's not in the portfolio because it's not a critical technology. Berkshire Hathaway, it's not in the portfolio because it's not a critical technology. But then you also have others that are critical technologies, but are not in the portfolio because they failed on the geostrategic risk rating. So again, taking a step back in terms of how this entire thing came about, we partner with a firm called J.H. Whitney. J.H. Whitney is a defense contracting firm and data and analytics firm. They work with multiple government agencies and they've developed a very unique algorithm that was their answer to the uh questions that they were receiving from the DoD when they were consulting about uh the Thrift Savings Plan, which is the largest retirement savings plan of our federal employees and our military men and women. And it's a trillion dollar uh plan. So they did an analysis and they ended up creating a unique algorithm called a geostrategic risk rating. What this does is it looks at 10 factors and it looks at entanglement risk of adversarial nations where there's higher geopolitical risk. So those nations are defined as China, Russia, North Korea, Iran. And then uh number two is everything else. But then the highest score goes to what we call the five I nations, where we share intelligence: United States, United Kingdom, Australia, Canada, New Zealand. And it looks at governance, it looks at commercial factors, and it looks at operational, meaning foreign ownership, board composition, country of incorporation, geographic revenue, strategic alliances, supply chains, and so forth. So, first you have the critical technologies filter. On the second side, you have the geostrategic risk rating. So you'll see few companies are not in the portfolio. And the reason they're not in the portfolio is because they might have heavy entanglement risk. Their revenue is heavily tied to China, their supply chains are heavily tied to China. So as a result, they're not in the portfolio. So what CRTC does is it does two things. One, you're following where trillions are going to be invested in the future technologies that are all critical for US national security. And on the other side, you're de-risking your portfolio for geopolitics, where some of these companies became very entangled due to revenue source and so forth with these areas. And unfortunately, there's the potential for collateral damage. So if you think of it almost as we built a bridge uh in the 90s uh or even 80s and 90s going to China, and we started doing quite a lot of business. This is at the height of globalization. And a lot of companies saw a huge opportunity with a uh population that was greater than 1 billion. So having the consumer in mind, they started to build a business in China. And now you're starting to see that sort of unravel. So we built this bridge, but in the past five to 10 years, more like the five past five years, you've seen a greater amount of distance being created between these two countries of the United States and China. So if you imagine and close your eyes that we built this bridge, but now it's starting to move further apart, what ends up happening? The middle of the bridge starts collapsing. And that's essentially that collateral damage that's going to occur. And that's what we're de-risking in the portfolio to prevent that risk from occurring with companies that are entangled with China.

SPEAKER_01:

So there's de-risking that you're talking about, but then it's also a defensive strategic tech fund, in a way, is that right?

SPEAKER_00:

Uh yes. I mean, the there are uh defensive uh specific areas within there, but it only makes up kind of 11% of the portfolio. But if you're thinking about it as defensive, as in you're de-risking for geopolitics, but also you're investing in areas that are the future of technology, like offense and defense kind of go hand in hand. And sometimes the best offense is defense, and sometimes the best defense is offense. And if you look at it in this uh category where this sort of does both at the same time, you're able to not only participate where trillions are flowing, but also at the same time, because US national security is so important now, and you're seeing such immense investment going into this, you're also aligning with where the government flows are. So in this case, offense is also defense.

SPEAKER_01:

So, Aram, I noticed some of the uh big blue chip stocks like Apple and Tesla aren't included in the fund. Is that because those are the uh what you said about offering too much closeness in terms of China?

SPEAKER_00:

Aaron Powell With a company like Apple, for example, if I'm not mistaken, the figure is they spent$53 billion developing the market in China, for example. Now, obviously that means that they're gonna have supply chain that comes from there. But also from a geographic revenue standpoint, I believe it's still about 19% of their revenue is received from China. So, you know, with Apple, that that's the reason why it's not in the portfolio. Tesla is sort of the same thing. You have uh a very large geographic revenue, you have supply chain, you have strategic alliances, you have um board composition. So uh the there are reasons why these companies sort of did not pass the mark for geostrategic risk ratings. So usually the the uh algorithm is if they score a 2.3 or higher, then they go into the portfolio. If it's lower, it's excluded. So both Apple in this case and Tesla in this case scored lower than that 2.3.

SPEAKER_01:

We're we're getting close to uh the end of our time here, but I want to ask you about two more stocks, Palantir and Rolls-Royce. Why particularly are those two stocks included in the fund?

SPEAKER_00:

So uh Palantir is actually self-explanatory. It's it falls into critical technologies, especially when it comes to cybersecurity, AI. Um, it is a US-based uh company. So they're scoring very high in geostrategic risk rating. But what's unique and what you might not get access to, and this is what also makes CRTC unique, is it is a global product where roughly 85% of the portfolio is in the US and the other is international. But the international companies that are in the portfolio are still under the umbrella of US national security. So Rolls-Royce is a particular company that in the past has been a beneficiary of large contracts with the uh DOD, now the DOW, um, especially when it comes to engineering um jet engines and they're working on hypersonics and things of that sort. So the beauty of CRTC is you're looking through the lens of a US national security, and you're investing alongside US national security interests while simultaneously de-risking your portfolio for geopolitics. And usually the question I get a question all the time from advisors is where does this fit into the portfolio? And we believe this is the next generation to the Nasdaq 100. Um the Nasdaq 100 was essentially created because it was um fashionable at the time for a lot of the technology companies to invest. So it became sort of the de facto uh allocation when you wanted heavy tech exposure. This is a different approach, but it's also an approach that aligns with an actual uh government investment style. So the investment premise is that you are following alongside US investments uh by the government as well as um other firms and banks that are uh investing alongside, while also allocating to a new future where geopolitical volatility is increasing and seems to be ever increasing, which is something that is unique and very difficult to sort of standardize the way we have with just volatility in general or standard deviation and so forth. Geopolitical volatility is not an easy thing to sort of quantify per se, but we are seeing our uh fund perform well over the year right now. And also, I mean, the way we look at this is twofold. It was designed to be a core allocation. So it sort of fit in between the SP and the NASDAQ 100. Or the other side is because it's sort of a catch-all, we call it a thematic core. So there's obviously thematic investing right now, whether it's biotech, whether it's AI, uh quantum computing, and so forth. This is sort of a catch-all that allows you to be sort of the benchmark and largest allocation of your opportunistic bucket. So you would use this the same way you would utilize something like an S P 500, because it is very similar. It has 220 holdings, it's heavily diversified. But at the same time, it is something that is catching the future technologies and investments of the US government. And then if you want to sort of dial things up and down, this is where your other thematic ETFs can potentially come into play.

SPEAKER_01:

And finally, for investors and advisors who want to go more to find out um about this fund and other funds, where should they go and how can they contact you?

SPEAKER_00:

They could come to our website at xtrackers.com or they could reach out to me at aram.babikian at dws.com.

SPEAKER_01:

And I know next week everyone should tune in because we're going to be discussing another one of your funds, XAIX. Um, but thank you for so much for joining me today, and thank you to everybody for watching. See you next week.

SPEAKER_00:

Thank you so much, Melanie.

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Michael A. Gayed, CFA

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