NATO’s latest push to strengthen its drone and counter-drone capabilities is shining a spotlight on a fast-growing corner of the defense industry—and the ETFs positioned to benefit. The alliance recently unveiled a new initiative aimed at making NATO “drone-ready,” with member nations expected to invest more than $40 billion in counter-drone capabilities over the next five years, underscoring how autonomous systems have become central to modern warfare.
Specialized funds such as the REX Drone ETF (NASDAQ:DRNZ) and Defiance Drone and Modern Warfare ETF (NYSE:JEDI) provide targeted exposure to companies developing military drones, autonomous systems, defense software, sensors and electronic warfare technologies. Although the funds have lacked momentum so fat this year, the growing investments in the space may provide a much-needed impetus.
Meanwhile, after languishing for most of this year, broader aerospace and defense ETFs, including the iShares U.S. Aerospace & Defense ETF (BATS:ITA) and SPDR S&P Aerospace & Defense ETF (NYSE:XAR), may also get a tailwind as established defense contractors win contracts tied to drone integration and counter-drone systems. The funds hold shares of names like General Electric Co (NYSE:GE), Lockheed Martin Corp (NYSE:LMT), and Rtx Corp (NYSE:RTX). While ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index, XAR follows the S&P Aerospace & Defense Select Industry Index.
The renewed investor interest follows NATO’s announcement of the $40 billion investment in counter-drone capabilities. Germany has also backed a 90-million-euro contract to supply 50,000 AI-enabled drones to Ukraine, while the U.K. has committed billions toward drone and counter-drone programs. The surge in spending comes as military planners increasingly view drones as essential battlefield assets rather than niche weapons.
Morningstar analyst Loredana Muharremi told CNBC that future warfare will rely on highly connected networks in which drones, satellites, tanks and other unmanned systems operate together. That shift is broadening the investment opportunity beyond drone manufacturers to include companies specializing in artificial intelligence, secure communications, radar, sensors, electronic warfare, satellite intelligence and battlefield management software.
ETFs to Watch
REX Drone ETF (DRNZ)
DRNZ tracks the VettaFi Drone Index, offering one of the most direct plays on the global drone ecosystem. The portfolio includes companies involved in unmanned aerial vehicle manufacturing as well as enabling technologies such as sensors, autonomous navigation, communications equipment and drone software. As military spending shifts toward scalable, AI-enabled drone systems, these companies are well positioned to benefit. The ETF charges 0.65% annually.
Defiance Drone and Modern Warfare ETF (JEDI)
JEDI tracks the BITA Drone & Modern Warfare Select Index, investing in companies that derive significant revenue from drone technology and modern defense systems. The ETF extends beyond drone manufacturers to include firms involved in autonomous weapons, AI, defense software and electronic warfare, providing broader exposure to next-generation military technologies. It carries an expense ratio of 0.69%.
iShares U.S. Aerospace & Defense ETF (ITA)
ITA provides diversified exposure to major U.S. defense contractors, many of which are investing heavily in unmanned aircraft, missile defense, electronic warfare and military communications. While less concentrated than DRNZ or JEDI, the fund could benefit as NATO members increase procurement of integrated drone and counter-drone systems.
SPDR S&P Aerospace & Defense ETF (XAR)
XAR’s equal-weighted approach gives investors exposure to a wider range of aerospace and defense companies, including mid-cap suppliers developing military electronics, autonomous systems and aerospace components. The structure reduces concentration in the industry’s largest contractors while increasing exposure to companies that could emerge as key suppliers in the drone value chain.
The Bottom Line
The latest NATO initiative reinforces that drones are no longer niche military assets—they are becoming an essential component of defense strategy. As governments channel billions into autonomous systems, AI-enabled surveillance, electronic warfare and counter-drone technologies, investors seeking exposure to this structural shift may find both specialized drone ETFs such as DRNZ and JEDI, as well as diversified aerospace and defense funds like ITA and XAR, well positioned to capitalize on this.
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