Normally, I get exhausted reading about all the niche ETFs that continue to be launched hoping to capture the buzz necessary to turn it into a viable investment vehicle. But I was intrigued when I came across the PureFunds Drone Economy Strategy ETF (NYSEARCA:IFLY). While the retail use of drones by recreational users and hobbyists has been well documented, it's the potential drone technology has in the commercial sector that carries so much promise.
Many might think of Amazon's (NASDAQ:AMZN) drone delivery testing as the biggest application of this technology but it actually has potential in several sectors. Energy companies can use drones for exploration. Agricultural businesses can use them to inspect soil and crops. Other industries like construction, media and real estate can all find practical uses for drones. Over time, the impact and acceptance of drone technology in day-to-day business could be huge.
The Drone Economy Strategy ETF looks to invest primarily in companies that have a significant drone technology component to their businesses. Companies are selected and weighted according to how much the drone sector is a part of their core business. Index components are reviewed semiannually by the index committee and are rebalanced accordingly.
I think the decision to weight the fund's holdings according to industry impact is a smart one. I profiled the Loncar Cancer Immunotherapy ETF (NASDAQ:CNCR) a while back and talked about how this fund is far from a pure play on the immunotherapy sector. It includes companies that are developing immunotherapy treatment technologies but that company can be any size. What that leaves is a portfolio that has a third of its investments in companies like Celgene (NASDAQ:CELG), Pfizer (NYSE:PFE), Amgen (NASDAQ:AMGN) and Merck (NYSE:MRK).
The Drone Economy Strategy ETF is a relatively concentrated fund (just 44 holdings with the top 10 comprising almost half of the fund's assets) but gives the heaviest weightings to companies with the greatest exposure to drones. This strategy gives you more of a pure play on the sector instead of a broad technology ETF.
The fund's top holding is AeroVironment (NASDAQ:AVAV), a technology solutions provider that designs, develops, produces and supports an advanced portfolio of unmanned aircraft systems and electric transportation solutions. Also in the top 10 are action camera stalwarts GoPro (NASDAQ:GPRO) and Ambarella (NASDAQ:AMBA). Boeing (NYSE:BA) also gets in thanks to its PhantomEye unmanned aircraft it's developing for the military. Others include foreign companies like Thales (OTC:THLEY), Parrot (OTCPK:PAOTF) and Bae Systems (OTCPK:BAESY).
The fund's expense ratio of 0.75% is a little high but not unreasonable. Total assets are just $2.6 million so liquidity and tradeability will be an issue until the asset base expands.
I'm not a huge fan of niche ETFs since some of them seem almost gimmicky. Some ETFs like another PureFunds offering, the Cybersecurity ETF (NYSEARCA:HACK), have filled a demand for direct investment in a hot growing sector and have done well. The Drone Economy Strategy ETF feels like one of those funds that checks off two important boxes - it provides a more pure sector exposure than many targeted ETFs do and it's investing in an area that could legitimately become a significant part of the economy.
This fund is probably too small to invest in right now but I like its chances of becoming a player in the technology ETF space down the road.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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