Structure Matters: Thematic Investors Should Look at Defense Spending

Broad Market Commentary

Despite economic uncertainties and the war hitting the 500-day milestone, hope for better times ahead has led to the stock market rebounding in 2023. Investor confidence and the optimism that surrounds market conditions may surprise many in the bear camp, as well as those who have been through market cycles before. Point of fact, it is usually easier to make a rational case to reduce short term equity risk in the face of near term known risk, but stocks tend to move higher in the long term. Ironically, it is the bond market with higher interest rates that has been hurt more during this period than the US Equity market.

Hidden Gems

The Russia -Ukraine War sadly continues with little evidence of a truce. While people do not die from cyber-security, nor does such technology lead to an assault of people’s homes, there can be no question that cyber-security is ubiquitous and an unending global invasion.

The invasion and bombing of people’s homes is terrible and far worse than the penetration and invasion by technology companies at the core virtual infrastructure of a company. Yet, in this week’s ETF Think Tank blog, we decided to review two sectors that are mostly under-owned by investors. To be honest, the world simply does not feel like a safer place and unfortunately military spending by the US needs to continue to rise. In fact, the U.S. budget for defense is now set at $857.9 billion (See Summary of Fiscal Year End 2023 National Defense Act here).  As our relationship with North Korea, and separately China, continues to be precarious, there is talk of such spending reaching the trillion dollar level.

However, investors appear to be ignoring ETFs in the industry – probably because stock performance has been uninspiring. Note, there are only 4 ETFs that provide targeted exposure to the defense industry and only the SPDR S&P Aerospace & Defense ETF (XAR) has achieved AUM mindshare. 

Hidden Gems: ETFs Worth a Second Look

A second look, however, is worth some time since the overlap between the dominant fund SPDR S&P Aerospace & Defense ETF (XAR) (launched 2011) and the newer fund launched by First Trust Index (MISL) on October 25, 2022 has a 64% overlap. As structure matters, we would also highlight that MISL also offers a 2024 return on equity of 17.9% and a PE multiple that is also below that of the S&P 500. This is not the case for XAR. Most sector strategies are managed pursuant to quantitative analysis, so these funds will be overlooked as their performance has been underwhelming. However, conditions do change, and steady industries supported by huge budgets can provide value to investors when breadth is narrow. Put differently, thematic portfolios tend to lean towards growth and overlook boring long term value opportunities that are out of favor. We think this could be a mistake.

Tank Shared Insights: From the Tank Battle Ground

Participation in Tank 1:1 meetings slowed down during the Fourth of July weekend, but due diligence continued on social media. A favorite Twitter post was from ‘@unusual-whales’ which highlighted how the 89-year old representative Diana Feinstein has accumulated a net worth of $200 million trading stocks. Exactly how her process has worked over her 30-year tenure in Congress remains a mystery, but congrats to her for building a nice retirement package. Glad she isn’t just relying on her pension from the government. Enjoy reading the entire Unusual Whales thread here .

Speaking of social media, those reading this blog know how committed we are in the Tank to our outreach on social media, aka Twitter, YouTube, LinkedIn and yes – now Threads. To this point, clearly Threads is set up well to rival Twitter. As a feeder, Instagram has some 1.6 billion users so Threads getting to 100 million users is no surprise. Moreover, if Twitter has 237 million users, the question is how many are bots and/or duplicates? The social media battle for mindshare is an ongoing struggle around insights that we think are important.


Thematic investors tend to look to growth ETF opportunities or funds with a “Hack Moment”, but the hidden gems can also be those ETFs which, at their core, are just “steady Eddie.” The terrible reality is that the world will not be a safer place in the future and the Aerospace and Defense industry might, unfortunately, benefit from these risks. If you don’t believe us – as a subtle reminder, just check your spam filter.

Most importantly, we are sad that the war continues. Please know that the intent of this piece is not to capitalize on the death and destruction that is taking place in the Ukraine, but rather to help fund the necessary strength of our US military. We know Congress is under pressure to reduce the budget and the US spends more than the next 10 largest countries combined.[i] To this point, just know that we will be monitoring with profound new rigor how Congress invests both as citizens with their own money, as well as our country’s money.[ii]




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