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Will The Drone ETF Fly After New FAA Rules?

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Operating drone businesses is likely to become a lot easier thanks to new rules set by the Department of Transportation’s Federal Aviation Administration. The new rule, which will become effective from late August, will enable businesses to fly drones in the U.S. subject to certain requirements including safety regulations for unmanned aircraft drones weighing less than 55 pounds that are conducting non-hobbyist operations. The new regulations are expected to provide a boost to the drone industry and spur innovations, jobs and save lives.

Drone Industry Set to Soar

Development of Unmanned Aircraft Systems (UAS) and Unmanned Aerial Vehicles (UAVs), popularly known as drones, has increased significantly in the last couple of years. The new rules could further enhance their appeal by escalating the use in areas such as crop, inspection and maintenance, aerial cinematography and photography, research, education and rescue operations.

As per industry estimates, over a decade, the rule could generate more than $82 billion for the U.S. economy and create more than 100,000 new jobs.

We note that the drones are already in use as agriculture tools. Currently, it is also used by the military. Several technology giants such as Alphabet Inc. GOOG and Amazon (AMZN - Free Report) intend to use drones in order to increase the efficiency of consumer package deliveries (read: Consumer Face Off: Wal-Mart versus Amazon ETFs).

As per a report by Statista, by 2020, the market for commercial drones is expected to be worth $6.4 billion.

Coming to our major point, the buzz about drones has put the spotlight on the solitary ETF targeting this category PureFunds Drone Economy Strategy ETF IFLY. The ETF lost 5.3% in the last one week (as of June 29, 2016), but there can be a reversal in fortune once the new rules are implemented (see all Technology ETFs here).

IFLY in Focus

This fund focused on the emerging commercial drone market provides exposure to 44 stocks by tracking the Reality Shares Drone Index. Launched in March this year, it has accumulated $2.4 million in its asset base while it sees volume of almost 4,000 shares a day on average. IFLY charges 75 bps in fees per year.

The fund has high concentration risk considering that the top two holdings – Parrot and AeroVironment, Inc. – command almost one-fifth of the fund’s assets. The rest of the stocks don’t hold more than 5% weight each.

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