After launching an ETF that tracks the video game industry, PureFunds launched a fund to cover another niche tech industry yesterday. The PureFunds Drone Economy Strategy ETF (ARCA: IFLY) tracks the Reality Shares Drone Index and comprises 47 companies that are "actively involved in developing, researching, or utilizing drone-related technologies and services as part of their business model."

The companies are divided into primary and secondary categories. The former consists of companies that work in drone development, manufacturing and research and the latter is composed of companies engaged in supporting and supplying drone development, "with suppliers having more than 10 percent of their revenue tied to pure-play drone companies."

The breadth of its coverage ensures that the fund is able to include companies from a wide variety of backgrounds. These range from online retailing behemoth Amazon.com Inc. (AMZN) to drone maker Aerovironment Inc. (AVAV). According to the company's press release, the top three holdings in the ETF are Aerovironment Inc.(12.4%), Parrot S.A. (PARRO.PA) (9.1%), and Boeing Co. (BA) (4.6%). The fund has an expense ratio of 0.75%.
Drones are poised to take off in a big way in major sectors of the economy.

According to Grand View Research, the market for commercial drones is expected to top a billion dollars by 2022. Other figures for the market size of drones peg these estimates even higher. For example, according to Statista, the market for commercial drones will be worth $6.4 billion by 2020.

Much of this growth is driven by use of drones in commercial applications. Drones are already being used in agriculture and by the military. Major technology conglomerates such as Alphabet Inc. (GOOG) and Amazon intend to use drones to speed up delivery of consumer packages. According to some reports, Google also plans to beam wifi using solar-powered drones. Similarly, Qualcomm Inc. (QUAL) launched its Snapdragon Flight Drone earlier this year at CES.

Whilst the outlook for drones is rosy, publicly-listed drone companies have been struggling. For example, AeroVironment, probably the only pure play publicly-listed drone maker, saw a drop in its sales revenue but swung to a profit only after taking advantage of a tax benefit. Its stock price is up by 6.74% on a yearly basis but a large part of that increase is owed to future expectations from the industry. On the other hand, Parrot SA swung to a loss in 2014 and its sales revenue barely inched up that year. Boeing is down by 17.33% in the last one year.

The Bottom Line

Based on future growth prospects, drones are an attractive industry. As such, drone ETFs make sense. But, the industry lacks coherent regulations and big players to push it forward. Once these are in place, it will be easier to predict performance for drone stocks and ETFs.

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