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Oh, I could drone on about the excessive number of quirky, fad exchange-traded funds (ETFs) that have hit the market this year. But in the case of the brand-new Rex Drone ETF (DRNZ), which started trading on Oct. 29, I do not see another tired excuse to own Magnificent 7 stocks. I see instead an ETF that actually does what it says it does. And in doing so, truly targets a market niche that to date is not dominated by the likes of trillion-dollar companies. Here’s how DRNZ describes itself: The REX Drone ETF provides investors with targeted exposure to companies driving growth in both defense and commercial drone applications. Unlike traditional aerospace or defense ETFs, this fund offers a dedicated focus on drones and UAVs, capturing the rapidly expanding use cases that span military reconnaissance, commercial delivery, agriculture, infrastructure inspection, and AI-enabled industrial automation. In a lot of professional sports, they say “it’s a copycat league,” but this is not the case here. That might change, but for now, DRNZ is focusing on companies besides the “usual suspects” in drone land. While Palantir (PLTR) is the dominant drone-related stock in terms of market size, it debuts in DRNZ at just a 3% position size. As an index ETF, DRNZ is not managed based on what people think. Instead, it is based on the VettaFi Drone Index, and the stocks are revisited for possible index composition changes (“reconstituted”) quarterly. That’s also when the existing holdings are rebalanced back to their index weights. So in between rebalancing dates, a stock can fly high, and temporarily take up a big portion of fund assets. How Focused on Drones Is DRNZ? DRNZ just introduced itself to the market, but it is one of a small set of drone-focused ETFs coming to a mobile trading app near you. The fund’s stock holdings are divided into two tiers. Those companies which are drone pure-plays, and those which are, shall we say, “drone-ish.” The former category makes up at least 80% of DRNZ, and the companies within that segment of the portfolio have at least half of their assets, revenues, or profits derived from the drone business. There are no direct competitors to DRNZ with past performance records. However, we can at least proxy this niche to aerospace and defense industry ETFs. The one that at first glance seems to be the closest fit is the S&P Aerospace & Defense SPDR (XAR). It has been available for 14 years, long before drones were in the public eye. These stocks are growthy for sure, but they also are not cheap, at 32x trailing earnings. That’s not surprising when the industry has performed this well. That’s a double in 5 years, in this chart below. May This Force Be With You Whether you go back in time far enough to remember flying saucers on The Twilight Zone, Star Trek, Star Wars or just those strange UFOs flying around the shores of New Jersey not long ago, it is quite exciting to see that drone technology has reached the commercialization stage. With DRNZ and its new peer ETFs, investors and traders now have the ability to take that enthusiasm and determine if they want to own a basket of such stocks, rather than trying to select winners individually.
