How High Can Drone Stocks Fly?

Stocks of companies tied to drone manufacturing have surged higher over the last quarter, as geopolitical tensions and support from the White House have increased demand.

LATEST DEVELOPMENTS:

• 2024 saw a 9.4% increase in global defence spending, , as Europe ramps up its efforts to counter Russian aggression and the United States shifts its focus toward the Far East.
• NATO recently agreed to boost its military spending to 5% of its GDP, and logically, an important portion of that investment will be directed towards "future weapons" such as drones.
• In June, US President Donald Trump also signed an executive order to promote air mobility, giving a boost to American drone producers.
• Drones are by the end of the decade.

Rising Demand and Military Spending

The prolific use of unmanned aerial vehicles (UAVs) for an increasing array of functions on the battlefield in Ukraine has been widely covered. Drones were a significant part of the recent Israeli-Iranian conflict and ongoing operations in Gaza, as well as attacks from Houthi rebels in Yemen towards Israel and the Red Sea.

It's not just defence, of course, as drones are increasingly used in various sectors such as public safety, agriculture, and logistics. Their pivotal role was underscored when China leveraged its exports of rare earth metals, which are necessary for building drone components, as part of the trade war with the US.

Downside Risks to Drone Stocks

While the outlook for drones appears strong, there are notable risks that could stall the recent momentum in drone-related equities. Many stocks in the sector have already priced in substantial growth, with valuations running ahead of earnings. Any meaningful de-escalation in major conflict zones such as Ukraine, the Middle East, or the South China Sea could ease immediate demand for military drones, at least in the short term. Peace may be good for the world, but it tends to cool off war-related trades.

The Key Players in the Sector

The largest drone sector ETF by market cap is the . This ETF has the following top 10 holdings:

• Jabil Inc. (JBL) – 8.66%
• Vertical Aerospace Ltd. (EVTL) – 5.28%
• EHang Holdings Limited (EH) – 5.16%
• AAR Corp. (AIR) – 4.65%
• Honeywell International Inc. (HON) – 4.26%
• FedEx Corporation (FDX) – 4.24%
• Northrop Grumman Corporation (NOC) – 4.04%
• AeroVironment, Inc. (AVAV) – 3.91%
• United Parcel Service, Inc. (UPS) – 3.56%
• LILM (LILM) – 3.52%

Many of these firms have been on a strong run since early April. Defence and Drone ETF

Momentum Shooting for New High

After taking a breather earlier this week down to the 20-period VWAP, the SPDP S&P Aerospace & Defence ETF (XAR) has resumed its upward trajectory. With the RSI moving near 70 but not yet reaching overbought territory, a short-term continuation could meet resistance at the VWAP high at $224.26.

However, extending to the round $230 level remains in question as the longer-term RSI formation shows divergence. On the other hand, a turn to the downside below the ‘autotrend’ line and VWAP could encounter support at the near-term swing low at $202, which coincides with the low VWAP.

Source: SpreadEx | XAR

Key Takeaways

Advancing technologies have made drones an indispensable tool on the battlefield, and now major powers are competing to lead in the field of drone technology. This includes increased spending in Europe and the US, with the global market for drones expected to reach $88 billion over the next five years. Pure-play companies in the sector are experiencing explosive growth, driven by rising investor interest.