Executive Summary

Enterprise is adopting drone technology and having completed their proof of concept phase last year, is now bringing these programs in-house. While competition keeps unit prices relatively low, enterprise adoption is increasing the average buy of hardware and software.

Government concern over security is leading to the development of new product lines and new offerings.

DJI, the largest drone manufacturer globally, has issued a security -based product specifically for governments which will be manufactured in the U.S. instead of China. Trade tensions with China may have an impact on the drone industry.

Large enterprise players are being brought into the drone industry through efforts to integrate drones into existing AirTraffic Control systems. For example, a partnership between Raytheon and drone airspace intelligence company AirMap was announced recently.

Drone delivery is becoming more of a reality as two threads come together: 1) the FAA has granted permission for both Google spin-off Wing and Amazon to test drone delivery; and 2) ASTM standards around drone parachutes have been developed, which has led to the FAA granting several waivers for flight over people – a necessary step for drone delivery to be practical.

Fund Performance

The ETFMG Drone Economy Strategy ETF (IFLY) returned 4.81% for the quarter ended June 30, 2019, in line with its benchmark, the Reality Shares Drone Index. The sector that had the largest positive impact on performance was Information Technology (+6.1%) followed by Industrials (+5.3%). Detracting from IFLY’s performance was Consumer Discretionary (-2.6%).

At the security level, IFLY had several strong performing holdings in Q2 2019. Positive contributors were led by Kratos Defense & Security (KTOS, +46.5%), Parrot (PARRO FP, +25.7%) and L3 Technologies (LLL, +24.7%). Detractors from performance included Aerovironment (AVAV, -17%), Autonomous Control Systems (ASELS TI, -13.1%) and GoPro Inc (GPRO, -16%).

As for fundamental factor performance, positive contributors included IFLY’s exposures to Global Markets, defense, and US equities. Detractors included the style factor Trade Activity and Size, as well as exposure to Japan.

Looking at the breakdown of the Style factor, IFLY was negatively impacted by its weightings to Trade Activity, Profitability and Size while there was some positive impact from Leverage and Momentum.

 

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Fund’s prospectus, which may be obtained by calling 1-844-ETF-MGRS (1-844-383-6477), or by visiting www.etfmg.com/IFLY. Read the prospectus carefully before investing.

Investing involves risk, including the possible loss of principal. Shares of any ETF are bought and sold at market price (not NAV), may trade at a discount or premium to NAV and are not individually redeemed from the Fund. Brokerage commissions will reduce returns. Narrowly focused investments typically exhibit higher volatility. Drone Economy Companies face intense competition, both domestically and internationally and are heavily dependent on the protection of patented intellectual property rights. In addition, Drone Economy Companies may be dependent on the U.S. government and its agencies for a significant portion of their sales, and their success and growth may be affected by budgetary constraints, spending reductions, congressional appropriations, and administrative allocations of funds that affect the U.S. government and its agencies. Investments in foreign securities involve political, economic and currency risks, greater volatility and differences in accounting methods. The Fund is non-diversified, meaning it may concentrate its assets in fewer individual holdings than a diversified fund. Investments in smaller companies tend to have limited liquidity and greater price volatility than large-capitalization companies. The Fund’s return may not match or achieve a high degree of correlation with the return of the Reality Shares Drone Index. To the extent the Fund utilizes a sampling approach, it may experience tracking error to a greater extent than if the Fund had sought to replicate the Index. Diversification does not guarantee a profit, nor does it protect against a loss in a declining market.

The Reality Shares Drone™ Index provides a benchmark for investors interested in tracking companies actively involved in drone technology and services. The Index uses Modified Equal Weight capitalization-weighted methodology. The index was created and is maintained by Reality Shares Index Committee. You cannot invest directly in an index.

ETF Managers Group LLC is the investment adviser to the Fund.

The Fund is distributed by ETFMG Financial LLC. ETF Managers Group LLC and ETFMG Financial LLC are wholly owned subsidiaries of Exchange Traded Managers Group LLC (collectively, “ETFMG”). ETFMG Financial LLC is not affiliated with Reality Shares.

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