An external entity is an external file that gets imported into the XML file (OPML is an XML format). They (meaning the URL they come from) are declared in the optional DOCTYPE declaration of the XML file. If you don't use the DTD then they won' get imported.
I don't see this as much of a security risk. The Issue says "... can cause sensitive local file contents to be read and copied into the outline". Yes, the outline could end up with unintended content from a local file. But what then? It's still only in a local file. If an attacker could get that file somehow, then he could have gotten the "sensitive local file" anyway - if he knew its file path beforehand.
defusedxml handles the case where one of those external entities expands the XML file by huge factors, in fact, by an exponential explosion. This can tie up all the computer's memory in seconds. One of these attack types has the name "billion laughs". Apparently defusedXML inspects the DTD for these kinds of entities. But if the DTD is disallowed then there can be no problem.
I don't think an OPML has any need for a DTD, so not processing one should be plenty good enough.