The Drone Revolution Reshapes Defense Industry Innovation
12 August 2025
- Drones’ combat effectiveness is changing the nature of warfare
- They have been made and sold in increasing numbers over the past 20 years
- Major defense companies are quickly improving their drone capabilities1
Key Risks: Government policy shifts, defense budget cuts, export controls and sanctions, political risk in client nations, trade policy volatility, dependence on government contracts, project delays and cost overruns, subcontractor and supplier reliability, cybersecurity threats, technological obsolescence, R&D failures. These factors can lead to significant losses, and past rallies may not be repeated.
Deep in Donald Trump’s ‘big, beautiful bill’ are tens of billions of dollars earmarked for spending on drones. The sweeping legislation includes $150bn for the Department of Defense to spend on innovative drone systems, naval technology and the modernization of US nuclear deterrence2.
It underlines the lessons being learnt from combat in Ukraine’s grinding three-year war. In the white heat of combat, drones are changing the nature of warfare: $400 unmanned aerial vehicles (UAVs) are taking out $2m tanks3.
Just as World War II proved the importance of the tank, so the effectiveness of today’s drone technology in Ukraine is widely acknowledged as a turning point. Inexpensive, quickly produced drones and other new technology have proved their essential place in modern warfare.
At a time when NATO’s members, mainly in Europe, are committed to ramping up defense spending from 2% of national output to 5% by 2035, the focus of defense ministries is turning in the direction of these UAVs4. The technology is readily available and cheap. Not only can drones give more bang for the defense procurement buck but also they are quickly bolted onto existing armed forces.
Drones on a Rising Trajectory
Over the past 20 years, the manufacture and sale of drones has proliferated. Notably, Turkey has emerged as a major supplier, as has China. Starting from a low base, the number of drone transfers – or sales and leases – has grown to total 633 between 1995 and 2023, according to research from the Center for New American Security (see chart)5. Roughly 40% of these went to Europe.
Military Drone Transfers Over Time, 1995-2023
Source: CNAS, Drone Proliferation Dataset, September 2024.
Indeed, drones are part of a burst in innovation underway in what’s expected to be a boon for defense tech. Drones perform many tasks on the battlefield. They’re well known for bombing raids but they also resupply troops on the ground, conduct maritime covert operations and can even swarm satellites in space.
They are being used to devastating effect in Ukraine, where aerial drones such as Russia’s modified Iranian Shahed drones are striking cities daily6. For its part, Ukraine has deployed maritime UAVs to make much of the Black Sea a no-go zone for the Russian fleet7.
Defense Giants Gear Up
While the Ukrainians and Russians are necessarily at the forefront of drone warfare, some of the businesses pioneering drone design and manufacture in the West are private companies such as Anduril in the United States and Helsing in Germany. Increasingly, their drones are guided by artificial intelligence (AI) systems that can’t be jammed electronically8. However, as with all emerging technologies, rapid innovation in AI-driven systems also brings risks, such as unproven operational reliability and uncertain long-term adoption, which could affect the commercial success of these firms.
Additionally, though, the larger, publicly listed defense companies such as those within the VanEck Defense UCITS ETF also have drone businesses that they are scaling up. With its focus on technology, the US company Palantir provides AI software and solutions that enhance drone operations9. Others are more directly involved in drones, with a range of specialties.
For instance, the US defense giant Raytheon Technologies as well as producing its own Coyote Block 2 loitering drone is a leader in counter drone technologies10, a rapidly expanding field. Meanwhile, in France Thales Group makes tactical drones and command platforms11. Returning to the US, Huntington Ingalls Industries is a leader in unmanned maritime systems12. Despite the growing market, competition in the defense sector is intense, and contracts are often awarded through lengthy procurement cycles, which may delay revenue recognition and introduce business uncertainty.
None of this is to say that drones will replace other weapons systems. The lesson of Ukraine is that they complement the massive firepower required for a sustained military campaign. But they are an unexpected and fast-growing part of the armory, and one where the US military as well as those in Europe and elsewhere is keen to invest. Still, demand can fluctuate significantly depending on geopolitical developments, and future defense spending is subject to change based on shifting government priorities or economic conditions.
At the same time, investors should bear in mind that investing in equities is risky. You may lose money up to the total loss of your investment due to the Main Risk Factors such as Equity Market Risk, Liquidity Risks and Industry or Sector Concentration Risk described in the KID and in the sales prospectus. Market evolution is not guaranteed.
Additional Glossary
- Equity Market Risk: the possibility that share prices fall, reducing the value of the investment.
- Liquidity Risk: the danger of not being able to sell fund units quickly at a fair price.
- Industry or Sector Concentration Risk: the chance of larger losses because investments are focused in a single industry.
1 CSIS, July 2025.
2 How Donald Trump’s spending bill will boost Silicon Valley’s defence companies. FT.com. Aug 5, 2025.
3 The Week, July 2025.
4 SIPRI, June 2025.
5 https://www.cnas.org/publications/reports/drone-proliferation-dataset
6 FT, July 2025.
7 Navy Lookout, July 2025.
8 Helsing, February 2025.
9 Palantir, October 2024.
10 RTX, July 2025.
11 Thales, July 2025.
12 Huntington Ingalls Industries, July 2025.
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