I recently discovered a new fund that shares my vision for investing in the Drone Industry: the AdvisorShares Drone Technology ETF (UAV). In this article, I do a deep dive on this new Drone ETF and critique it. Read on to learn what you need to know before investing, and to see how UAV stacks up to our DRONES Index.
AdvisorShares is a global investment management firm that specializes in thematic exchange-traded funds (ETFs). For those unfamiliar, an ETF is functionally similar to a mutual fund, in that it is an investment vehicle comprised of multiple individual holdings (stocks, bonds, etc.). ETFs differ from mutual funds in that they are tradeable on an exchange as if they were a simple stock. Thematic ETFs focus investments on a particular niche: cryptocurrency, electric vehicles, and cannabis are other examples of ETF themes.
If you have followed my blog since I began (February 2021), you might recall my original motivation: to help “retail investors, investment firms, and financial advisors who are interested in harnessing the growth of the burgeoning Drone industry.” I introduced the DRONES Index in March 2021; in that article, I explained that there were two pre-existing ETFs and one Index that claimed to track the Drone Industry, but I did not feel that they met my particular objectives.
- U.S.-based companies
- Publicly traded (no OTC/Pinks)
- Weighted by conviction in the Drone Industry
AdvisorShares launched the UAV ETF on 4/26/22. It is diversified across many market sectors. At first glance, it appears to share similar goals to my own:
“The Fund seeks long-term capital appreciation. Under normal circumstances, the Fund invests at least 80% of its net assets in securities of companies that derive at least 50% of their revenue or profit from the use and/or manufacture of drones or technology used in the development and manufacture of drones.”
Here are some of its vitals.
- Beta: N/A
- Yield: 0.0%
- Expense Ratio: 0.99%
- Assets Under Management (AUM): $360,000
- Net Return (Since Inception): -5.3%
This is a relatively new (4 months as of this writing) and tiny (based on AUM) ETF. The Expense Ratio is at the higher end of the spectrum, so we can assume that it will be actively managed with significant turnover.
Before I analyze UAV’s details and compare it to DRONES, I will reinforce that AdvisorShares’ objectives are different from my own. AdvisorShares seeks to grow its investors’ capital, and the UAV ETF aims to achieve that with an eye toward the Drone Industry. On the contrary, my DRONES Index seeks simply to track the overall growth of the U.S. Drone Industry. Stated a different way: UAV has a responsibility to invest in companies with a reasonable chance of turning a profit, while DRONES has the luxury of no such responsibility.
Let us begin.
Let’s start with looking at how UAV allocates its AUM.
- Stocks 82.82%
- Cash 9.10%
- Bonds 8.08%
Of its $360,000 in (currently) invested assets, approximately 83% are invested in equity stocks. The remaining 17% is evenly split between Cash (and equivalents) and Bonds. Right off the bat, we see that only about 80% of its total assets are directly invested in companies in the Drone Industry, which aligns with its policy statement referenced above. The remaining 20% of assets are invested in low-volatility, stable investment vehicles that are presumed to provide a bit of a hedge against deteriorating market conditions.
It is common for an ETF, especially a thematic ETF such as this, to have some percentage of assets in cash and bonds; this supports the ETF’s mission to maintain liquidity and manage investor risk. 20% is a bit higher than I am accustomed to seeing, but it is within the same ballpark as other risky thematic ETFs.
The ETF policy contains the words “under normal circumstances”. But these aren’t “normal circumstances”, are they? The fund was launched at the beginning of a bear market which is likely to evolve into a recession. It comes as no great surprise that the fund is down 5.3% since inception; if it had invested 100% of its assets into these high-risk stocks, it would be down upwards of 10%! Being such a young ETF, I think it is very reasonable to park some of its assets in liquid safe havens (such as bonds and cash equivalents) while awaiting favorable macroeconomic conditions. This provides a ready cash reserve to pounce on emerging opportunities as they arise, which happens frequently with this industry.
Equity Holdings Selection
Next, let’s look at the companies UAV contains within its holdings portfolio, and how they are weighted.
Stock Ticker Security Description Portfolio Weight %
JBL JABIL INC 7.20%
RCAT RED CAT HOLDINGS INC 5.47%
BLDE BLADE AIR MOBILITY INC 4.48%
LMT LOCKHEED MARTIN CORP 4.36%
NOC NORTHROP GRUMMAN CORP 4.09%
TRMB TRIMBLE INC 3.90%
FDX FEDEX CORP 3.86%
UPS UNITED PARCEL SERVICE-CL B 3.86%
QCOM QUALCOMM INC 3.73%
AXON AXON ENTERPRISE INC 3.51%
JOBY JOBY AVIATION INC 3.06%
GPRO GOPRO INC-CLASS A 2.99%
EADSY AIRBUS SE – UNSP ADR 2.83%
EVTL VERTICAL AEROSPACE LTD 2.79%
LILM LILIUM NV 2.53%
KTOS KRATOS DEFENSE & SECURITY 2.40%
ACHR ARCHER AVIATION INC-A 2.23%
AMZN AMAZON.COM INC 2.21%
UAVS AGEAGLE AERIAL SYSTEMS INC 2.07%
LHX L3HARRIS TECHNOLOGIES INC 1.97%
TDY TELEDYNE TECHNOLOGIES INC 1.94%
GOOG ALPHABET INC-CL C 1.88%
EH EHANG HOLDINGS LTD-SPS ADR 1.84%
DPRO DRAGANFLY INC 1.69%
ONDS ONDAS HOLDINGS INC 1.61%
NVDA NVIDIA CORP 1.37%
ESLT ELBIT SYSTEMS LTD 1.04%
AVAV AEROVIRONMENT INC 0.98%
TXT TEXTRON INC 0.98%
HON HONEYWELL INTERNATIONAL INC 0.98%
BA BOEING CO/THE 0.97%
THLLY THALES SA – UNSP ADR 0.95%
ALPP ALPINE 4 HOLDINGS INC 0.90%
TAKOF DRONE DELIVERY CANADA CORP 0.84%
WKHS WORKHORSE GROUP INC 0.54%
AMBA AMBARELLA INC 0.50%
TTTXX BLACKROCK TREASURY TRUST INSTL 9.84%
$$$ CASH 1.61%
When I compare this chart with the ETF’s asset allocation percentages, I admit that I am scratching my head. TTTXX is a money market (cash equivalent) as far as I can tell—it invests in cash and U.S. Treasury Bills/Notes. According to this table, TTTXX + $$$ = 11.45%, which is greater than the 9% Cash allocation the ETF cites. I cannot find any assets that clearly stand out as Bonds, to which the ETF claims 8% exposure. If any readers (especially readers from AdvisorShares) would care to enlighten me, I would be grateful.
I see tremendous similarities between UAV’s company holdings, and those that I selected for DRONES. It feels validating. UAV currently tracks 36 companies, while DRONES tracks 38 companies. One key difference is that UAV includes 7 foreign companies (EADSY, EVTL, EH, DPRO, ESLT, THLLY, TAKOF) while DRONES is a pure U.S. domestic play. UAV curiously neglects two foreign companies I expected to see: Parrot (PAOTF) and Plymouth Rock Technologies (PLRTF). My conjecture is that they are avoiding companies listed as OTC/Pinks, which I also avoid in DRONES.
Why did UAV select these particular companies? The ETF policy cites a benchmark of 50% of a company’s revenue/profit coming from drone technology as the primary criterion for making this list. I use the vernacular “Drone-Dedicated” to describe such a company, while “Drone-Diversified” implies that drones are merely some small portion of the company’s overall business. If UAV’s holdings were to abide by its written policy, I would expect the list to look something like this.
Stock Ticker Security Description Portfolio Weight %
AVAV AEROVIRONMENT INC 30.00%
UAVS AGEAGLE AERIAL SYSTEMS INC 25.00%
EH EHANG HOLDINGS LTD-SPS ADR 15.00%
PAOTF PARROT S.A. 10.00%
RCAT RED CAT HOLDINGS INC 5.00%
DPRO DRAGANFLY INC 5.00%
TAKOF DRONE DELIVERY CANADA CORP 5.00%
PLRTF PLYMOUTH ROCK TECHNOLOGIES INC. 5.00%
This is obviously too short a list to comprise an entire ETF, so I agree with their decision to include Drone-Diversified companies as I have done. However, I would offer that the ETF should revise its policy statement to imply that it invests in companies that “derive a significant portion of their profit/revenue” from drone technology (or words to that effect). Transparency matters. The word “significant” offers a lot of leeway for just how focused a company is on drone technology. For juggernauts like GOOG and AMZN, drones will never even be a line item on their annual reports; for companies like AVAV and UAVS, drones are all of the line items.
This leads to another contrast between UAV and DRONES: weighting methods. In DRONES, I attempted to weight the index by the companies’ conviction in the Drone Industry—AVAV and UAVS are weighted high as Drone-Dependent, while GOOG, FDX, and UPS are weighted low as Drone-Diversified. UAV takes a different approach: it appears to weight its holdings by investment risk. Given enough time, I could probably reverse-engineer the weighting criteria; for now, my curiosity is satisfied by the assumption that low-risk, highly-recommended stocks are weighted higher than their opposites.
Drone-Dedicated businesses tend to be higher risk than their Drone-Diversified counterparts, and UAV compensates with lower weighting. Case in point: DRONES’ top 2 holdings (AVAV and UAVS, 16%) combine for a mere 3% of UAV’s holdings. This aligns with the firm’s core mission to manage investor risk by giving the fund maximum exposure to stable assets and minimum exposure to volatile assets.
Compare and Contrast
Just for the sake of comparison, let’s look at UAV and DRONES side-by-side. I will even add the QQQ ETF (tracking the NASDAQ Composite) as a bonus. As I write this prior to collecting the data, I fully expect that UAV will have a higher return than DRONES over this period, and that QQQ will crush them both. As usual, I will use one of my automated investing research tools to make quick work of the graphs.
I confess that even I am a bit surprised by the results—DRONES outperformed both UAV and QQQ over this (short) period! Note that DRONES and QQQ also return meager dividend yields (~0.5%) while UAV does not (yet). It is completely unfair to compare ETFs and indices by a 4-month sample. But I will still wear this feather in my cap for a few days. #alpha
I am very excited that a global investment firm of AdvisorShares’ caliber thinks highly enough of the Drone Industry to launch a new ETF that focuses on this particular market. In a few years, I hope we see the timing as very fortuitous, while most of these stocks are trading at a steep discount. I have no doubt that the ETF will provide a healthy return for many years to come.
Will I personally invest in UAV? Probably not. I prefer U.S. drone stocks out of both a sense of patriotism and a desire to not pay foreign taxes on my passive income. I also prefer to invest my equity portfolio in, well, equity—I have a separate portfolio for Bonds and Cash Equivalents and I don’t need UAV to make that decision for me. I also, also prefer to keep my dividend distributions instead of paying them into the fund. I also, also, also prefer to not pay a 0.99% Expense Ratio for a fund manager to do exactly the same research that I do for this free blog.
Should you invest in UAV? That depends, and I won’t try to persuade you one way or another. If you like the idea of parking your money in a passive account for a fund manager to actively manage on your behalf, diversified within the Drone Industry, then UAV might be a good choice for you. Otherwise, if you are a hands-on investor that prefers to do some research and make your own focused investing decisions in the Drone Industry, then you might be better off following my DRONES Index and managing your own portfolio based on your unique objectives.
Whichever category you fall into, please always consult a Financial Advisor prior to making an investment decision. Paladin Automation LLC makes no formal recommendations for or against any investment strategies or assets contained within this post and is long several positions mentioned in this blog series.
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