First Trust Indxx Aerospace & Defense ETF (MISL)

The aerospace and defense sector is unlike most others. It is dominated by a handful of enormous American contractors — names like Lockheed Martin, Northrop Grumman, Raytheon Technologies, Boeing — that have been shaped by century-plus histories of government contracting, war, and technical innovation. Alongside them sit mid-sized specialist suppliers (avionics, engines, missiles, radar, communications systems) and international players, primarily from Europe and Israel. The sector is cyclical but in a different way than the stock market usually is: it is driven less by the economic cycle than by government budgets, geopolitical tension, and the pace of military modernization.

MISL is a straightforward tracker of this sector. It holds a basket of publicly traded aerospace and defense companies selected by Indxx, a passive-index provider. Rather than trying to pick which defense stocks will outperform, MISL simply owns the index, allowing investors to gain exposure to the sector without betting on individual names. This passive approach is sensible in aerospace and defense for a simple reason: the sector’s performance is heavily dependent on government decision-making and geopolitical events, which are inherently unpredictable. Over a full cycle, active managers rarely consistently beat a broad index; MISL’s low fees and broad holdings sidestep that battle.

The holdings span several tiers. The largest positions are the major prime contractors — companies that win large government contracts and integrate subsystems from suppliers. They design and build fighter jets, transport aircraft, satellites, missiles, ships, and related systems. Second-tier holdings include large suppliers — companies making jet engines, avionics, communications equipment, armor, or radar systems. Third are smaller, specialized manufacturers focused on niche capabilities: a company making missile guidance systems, or composite materials for aircraft, or electronic warfare systems. The index also includes some pure-play commercial aerospace (commercial aircraft manufacturers like Boeing) as well as space-related companies, reflecting the sector’s broadening reach.

The geographic mix is predominantly American, reflecting US defense spending dominance and the listing of major contractors on US exchanges. However, MISL also holds European players (from countries like France, Germany, and Italy) and Israeli companies, which have significant aerospace and defense industries. A smaller allocation to Japanese and other Asian companies is also typical.

What drives the sector is a simple equation: government military budgets, plus geopolitical tension, plus technological obsolescence. When tensions rise, governments approve bigger defense budgets and accelerated weapons procurement. When a military system becomes obsolete — or a near-peer competitor develops a better one — demand for modernization and replacement spikes. The US has been broadly increasing defense spending for the past two decades, driven by the wars in Iraq and Afghanistan, China’s military buildup, Russian aggression in Ukraine, and broader NATO expansion and modernization. This tailwind has been favorable for the sector.

However, there is a ceiling. Defense budgets are governed by political will, fiscal constraints, and priorities. The US federal deficit is large, and deficit hawks periodically push to cut defense spending. Politicians in peacetime can lose appetite for military spending. Conversely, a major war or a threat to a key ally (as happened with Russia’s invasion of Ukraine) can turbocharge spending and demand for weapons. Predicting these shifts is notoriously difficult.

For individual companies, contract concentration is a risk. A large contractor might depend on two or three major government contracts for half or more of revenue. Loss or delay of one contract can crater profits. The US government is by far the largest customer for these firms, so political shifts or budget battles can directly affect results. Moreover, defense companies operate under complex compliance, security, and regulations that create barriers to entry (a moat) but also expose them to regulatory and political change.

The sector is also technologically driven. Hypersonics, artificial intelligence, unmanned systems, space-based reconnaissance, cyber capabilities — these are the frontier of modern warfare, and contractors race to develop them. Companies that master a new technology can thrive; those that lag can lose contracts. This creates a form of technological risk distinct from typical business cycles.

Geopolitical events are the wildcard. A US-China conflict over Taiwan, a North Korean nuclear test, a Russian invasion, a Middle East war — any of these would reshape defense spending and contractor fortunes unpredictably. MISL investors are, in effect, betting that the global military- spending environment will remain stable enough to support the sector’s continued growth.

For investors, MISL offers broad exposure to the sector without picking individual names. It is suitable for those who believe that defense spending and military modernization will remain elevated, or who see the sector as a hedge against geopolitical instability. It is less suitable for pacifists or those uncomfortable with the sector on principle. The dividend yield is typically low, because defense contractors reinvest profits into R&D and buybacks rather than paying large dividends. Price appreciation, not income, is the expected return driver.

To evaluate MISL, investors should review the fund’s holdings to understand the geographic and subsector mix, check the expense ratio against other sector ETFs, and monitor news about defense budgets and geopolitical developments. The sector’s valuation relative to the broader market, and the level of military spending relative to GDP, provide frames for assessing whether prices are reasonable. Over a three-to-five-year horizon, tracking defense budgets and geopolitical risk is more informative than studying the economic cycle.