Some Drone ETFs Are Soaring. Here’s What to Know

Drones soar, but so do investors’ hopes to capitalize on them.

Last month, REX Shares launched its Drone ETF (DRNZ), which allocates 80% of its portfolio to companies that profit off drones or or unmanned aerial vehicles (UAVs). The launch came just a month after Defiance brought its Drone & Modern Warfare ETF (JEDI) to market, which tracks an index of military technology companies and is concentrated in aerospace defense. The launches signal growing issuer interest in capturing upside from a booming aerospace defense industry, which had a global revenue of $922 billion last year and point to an outperforming segment that advisors may want to dip their toes into in the new year. Some aerospace industry funds are up 40% year to date, or more.

“[Drone ETFs] seem to capture a subsection of the broader aerospace and defense theme,” said Zachary Evens, an analyst at Morningstar. “We’re also seeing, outside of defense, a little more interest in drones more generally.”

Scanning the ETF Skies

Companies making drones and other unmanned military-grade technologies often get their revenue from government, or government-affiliated, contracts. Because defense spending has been sky-high of late — global military expenditures hit $2.7 trillion last year, an increase of 9.4% from 2023 — profit margins for these firms have also gone up. But defense spending is only one piece of the puzzle, Evens said. “A lot of the biggest companies in those ETFs are companies like Boeing, Lockheed Martin and RTX Corporation,” he said. “Those kinds of big industrial manufacturers definitely have business lines in defense, but they have other business lines as well.”

Other aerospace industry ETFs with exposure to drones include:

• The iShares U.S. Aerospace & Defense ETF (ITA), which is up 46% year to date.
• Invesco’s Aerospace & Defense ETF (PPA), which is up 35% year to date.
• The Global X Defense Tech ETF (SHLD), which is up 79% year to date.

Flight Risk: But are drone ETFs worth the investment? Evens thinks they fall into the same category of niche products that could swing either way performance-wise but are worth it for investors convinced of a sector’s potential. “If an investor has extreme conviction in the stocks that underlie these strategies, then they can allocate a small portion of their portfolio [to them]. They’re very risky in the sense that a lot of the stocks tend to be highly correlated,” he said. “So when the ETF does well, it might do very well. But when the ETF does poorly, it might do very poorly.”