3 Defense ETFs amid Fears of a Costly Drone War

Iran’s increasing use of large drone swarms in attacks across the Gulf is raising fears that the region could face a long and costly drone war. According to figures released by Gulf defense ministries and reported by Reuters, Iran had launched more than 540 missiles and over 1,450 drone strikes against regional countries as of March 3. Importantly, drones made up about three-quarters of all the attacks. In many ways, these tactics are similar to what has been seen in Ukraine, where large waves of cheap drones are launched alongside missiles to overwhelm air-defense systems.

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However, analysts say that Iran’s strategy in the Gulf appears designed to stretch U.S. defense systems across multiple countries at the same time. And while Gulf countries have managed to intercept many of the incoming threats, doing so is extremely expensive. In fact, to stop these attacks, countries in the region rely on advanced systems such as the U.S.-made Patriot missile defense system, THAAD interceptors, and fighter jets like Rafales, F-15s, and Eurofighters. However, experts warn that this approach may not be sustainable if the conflict continues for a long period.

This is because some estimates suggest that for every dollar Iran spends producing drones, Gulf states may spend between $20 and $28 trying to destroy them, while a single interceptor missile can cost more than $1 million. Therefore, analysts argue that countries urgently need cheaper counter-drone tools, such as electronic jammers, directed-energy weapons, and automated guns. Meanwhile, the increase in military spending is also attracting attention from investors, especially those looking at defense and aerospace companies. As a result, the following defense ETFs could benefit if the war drags on:

• ARK Space Exploration & Innovation ETF ARKX -0.16% ▼

• iShares U.S. Aerospace & Defense ETF ITA +0.07% ▲

• SPDR S&P Aerospace & Defense ETF XAR <+0.01% ▲

Which Defense ETF Will Benefit the Most?

Turning to Wall Street, out of the three ETFs mentioned above, analysts think that ARKX has the most room to run. In fact, ARKX’s price target of $40.47 per share implies 28.5% upside potential.

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