Executive Summary

The UAS Integration Pilot Project is progressing well. Department of Transportation Secretary Elaine Chao and the Administration are actively promoting successes in urban drone delivery for medical supplies, as well as further applications in public services — one of the fastest growing verticals for the market. The comment period on two new laws regarding the flight of drones over people and flight beyond visual line of sight is coming to a close, and they look likely to be enacted soon. That is major progress, as it will materially assist with long distance infrastructure inspections and numerous applications in urban environments.

Progress on unmanned traffic management systems around the world has been sped up since December 2018, when hundreds of flights were cancelled at Gatwick Airport near London, England, following reports of drone sightings close to the runway. That is good news for the drone industry, as major partners such as AirMap have joined forces with air traffic technology companies and as a result the ability to identify both compliant and non-compliant drones in the airspace is now evident.One interesting note: PwC points out that a major winner in the drone industry will be telecom — remote ID and tracking requires that drones maintain communication with air traffic control. That means a win for the telecom companies, particularly Verizon, as they are racing to get involved.

Fund Performance

The ETFMG Drone Economy Strategy ETF (IFLY) returned 14.1% for the quarter ended March 31, 2019, in line with its benchmark index and consistent with the technology recovery in the early months of the year. The sector that had the largest positive impact on performance was Industrials (+12.3%), which represents more than 65% of the index, followed by Information Technology (+13.8%) and Consumer Discretionary (+33.5%).

At the security level, IFLY’s holdings were firing on all cylinders throughout Q1 2019. Positive contributors to IFLY’s performance were led by Vestel Electronics (VSTL TI, +118.6%) Boeing (BA, +18.9%) and Ambarella (AMBA, +23.5%). Detractors from performance included Drone Delivery Canada (FLT CN, -15.3%), Aselsan Elektronik Sanayi (ASELS TI, -16.8%) and Sony Corp ADR (SNE US, -12.5%).

As for fundamental factor performance, positive contributors included exposures to IFLY’s exposures to global markets, US equities and the style factor Trade Activity. Detractors included the style factor Size, Japan exposure, the Euro and Turkish exposure.

Examining the subcategories of the Style factor, we see the negative effects of portfolio weightings to Volatility, Profitability and Size and some positive effect from Leverage and Value.

 

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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