MISL ETF May Soar as Threats of Wider War Gain

There is a line from The Godfather, “It’s not personal, it’s business.” 

Hamas’s attack on Israel on Oct. 7 was not business for me—it’s personal. My only niece and her husband are sitting in a safe room in Tel Aviv. She works for the United Nations, taking care of refugees. My family is lucky; while one of the many people in harm’s way, she is not among the more than 1,200 Israeli casualties of Hamas's attack.  

The war in Ukraine began in February 2022 and 20 months later, another war has erupted in the volatile Middle East. While in its early days, the escalation potential is high. The world is violent, with conflicts requiring more military arms and equipment daily. The First Trust Indxx Aerospace & Defense ETF (MISL) owns shares of the leading U.S. defense and defense-related companies.  

MISL Poised for More Gains as Weapons Demand Jumps 

War, in the form of modern weaponry, costs a lot to wage. The U.S. and its allies have supplied increasing weaponry to Ukraine since early 2022. Russia has used its petroleum revenues to fund its rising military budget. Another war in the Middle East has raised the demand for weapons and could create shortages. Arms manufacturers will increase output as the global war machine operates at full steam. 

Defensive contractors’ profits have an inverse correlation to world peace. Sadly, the defense sector will likely become the most significant growth business over the coming months and years.  

General Dynamics, Northrop Grumman, Lockheed Martin and Boeing Co. provide military hardware to the U.S. and allies worldwide. Two significant wars will only increase demand for their hardware and ammunition—and cause profits to soar. The war in Israel only escalates the need for military supplies, and other brewing conflicts could have these companies working overtime to head off shortages.  

Spike After Oct. 7 attack

The First Trust Indxx Aerospace & Defense product has more than 33% exposure to the four leading U.S. defense companies.

 MISL closed at $21.53 on Friday, Oct. 6. The tragedy in Israel and its war declaration pushed shares roughly 7% higher to a $22.96 high on Oct. 12—and MISL opened at $23.51 on the morning of Mon., Oct 16. As the wars continue, leading military contractors’ profits will likely rise and push MISL higher.  

No Recession in Defense 

MISL began trading in October 2022. At its current level, MISL has more than $42.2 million in assets under management. MISL trades an average of 23,000-plus shares daily, making it a small and relatively illiquid product that charges a 0.60% management fee. But with wars raging in Europe, the Middle East, and other worldwide hot spots, the odds favor more activity and rising prices. 

While higher rates could cause a recession, war means no contraction in the defense sector, making it a “defensive” sector for investors in a shaky and questionable investment environment.

The etf.com Fund Flows Tool highlights the nearly $8 million flowing into MISL since the attacks. While a small amount, it is significant considering MISL’s market cap.  

Three Reasons for Defense Stocks 

At least three factors will shape defense stocks and MISL over the coming months and perhaps years: 

• The world has become more dangerous as wars in Ukraine and now Israel-Gaza rage in October 2023.  
• The bifurcation of the world’s nuclear powers and deteriorating relations between Washington and Beijing favor significant military defense spending budgets.  
• Higher U.S. interest rates and a still-hawkish Fed increase the odds of a recession. Investors seeking safety for capital will likely turn defensive, and the defense sector offers potential growth in the current environment.  

I hate writing this piece and recommending military stocks: The reasons represent an affront to humanity. While we hope for the best, the current geopolitical landscape requires us to prepare for the worst. Defense spending will jump and thus make MISL and defense stocks a haven during a perilous historical period.