NATO's latest push to become "drone-ready" is putting a fast-growing corner of the defense industry in the spotlight—and the ETFs that track it. The alliance recently unveiled a new initiative, with member nations expected to invest more than $40 billion in counter-drone capabilities over the next five years. It's a clear sign that autonomous systems are no longer a sideshow; they're central to modern warfare.

For investors, that means opportunity. Specialized funds like the REX Drone ETF (DRNZ) and the Defiance Drone and Modern Warfare ETF (JEDI) offer targeted exposure to companies building military drones, autonomous systems, defense software, sensors, and electronic warfare tech. Both funds have had a sluggish start this year, but the growing investment wave could provide the momentum they've been missing.

Meanwhile, broader aerospace and defense ETFs like the iShares U.S. Aerospace & Defense ETF (ITA) and the SPDR S&P Aerospace & Defense ETF (XAR) might also get a tailwind. These funds hold shares of established defense contractors like General Electric (GE), Lockheed Martin (LMT), and RTX Corp (RTX), which are likely to win contracts tied to drone integration and counter-drone systems. ITA tracks the Dow Jones U.S. Select Aerospace & Defense Index, while XAR follows the S&P Aerospace & Defense Select Industry Index.

The renewed interest follows NATO's announcement, but it's not just the alliance spending big. Germany has backed a 90-million-euro contract to supply 50,000 AI-enabled drones to Ukraine, and the U.K. has committed billions to drone and counter-drone programs. The message is clear: drones are essential battlefield assets, not niche weapons.

Morningstar analyst Loredana Muharremi told CNBC that future warfare will rely on highly connected networks where drones, satellites, tanks, and other unmanned systems operate together. That shift broadens 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 like sensors, autonomous navigation, communications equipment, and drone software. As military spending shifts toward scalable, AI-enabled drone systems, these companies are well positioned. 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 like DRNZ and JEDI, as well as diversified aerospace and defense funds like ITA and XAR, well positioned to capitalize on this trend.