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How to Invest in Drone Technology

From Lady Gaga using hundreds of Intel Corp. (ticker: INTC) Shooting Star drones during the Super Bowl halftime to Amazon.com's ( AMZN) patent for its blimp-like airborne flying center to help drones quickly deliver packages, there are plenty of reasons unmanned aerial vehicles are going mainstream.

"Right now, the drone industry is going through some big changes," says Ian Smith, host of the Commercial Drones FM podcast who also works in business development at DroneDeploy in San Francisco. "Many companies who previously focused mainly on recreational and hobby drones are pivoting to the commercial market after facing extreme pressure from the global drone market share leader [China's] DJI."

Much of that change comes in the wake of the Federal Aviation Administration Part 107 regulations that were implemented in August 2016. The rules allow any business in the U.S. to legally operate drones commercially after taking a test, but mandates every drone owner register each device between 0.55 and 55 pounds, fly only during daylight and stay below 400 feet with a top speed of 100 miles per hour.

Frank Palermo, executive vice president of Global Digital Solutions for VirtusaPolaris in New York, says the legislation was put in place to protect consumers while also recognizing that drone technology is going to be "a part of our fabric." While seeking to avoid being overly strict, the agency banned the flying of hazardous materials over structures and other safety regulations.

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At the same time, much of the shift happening within business is focused on improving safety for company employees while increasing productivity. The commercial drone market -- $5.2 billion in 2015 -- will reach $27.1 billion by 2021, according to WinterGreen Research, a market research firm.

Many drones are being fitted with sophisticated cameras that offer higher quality resolution and sharp images, Palermo says.

"We've seen a lot more interest in some of the manufacturing and insurance spaces where people are trying to figure out how to augment human behavior with drone capabilities," he says.

Palermo cites Hurricane Sandy as an example. Homeowners were frustrated with the length of time it took to get adjusters to review their claims. "If you use automated drone technology, you can cover a lot more ground," he says. "Or hazardous scenarios like an oil spill or gas leak, where it's much better to send an automated drone than a human being."

Palermo says drones are also being used for inspections by Royal Dutch Shell ( RDS.A) which wants to review its oil and gas facilities, and Commonwealth Edison Co. to reach thermal systems within its steam plants. Another example is Network Rail, the largest railway in the U.K., which uses drones to take 3-D photographs of its track system. The information allows the rail company to reduce trips by field crews, Palermo says.

Who is investing? There's a variety of U.S. companies investing in this space, including Lockheed Martin Corp. ( LMT), GoPro ( GPRO), Boeing Co. ( BA), Amazon and Alphabet ( GOOG, GOOGL). Last fall United Parcel Service ( UPS) conducted a series of tests to simulate how medicine could be delivered to a YMCA day camp.

"The list is pretty long in this space," Palermo says. "It's becoming huge and global. That's a good indication that it's a market worth paying attention to."

Smith says Intel has been making strategic investments, including patents, as well as partnerships including investments in Airware, PrecisionHawk and Shanghai-based Yuneec International, as well as purchasing Ascending Technologies, a German drone startup that makes multi-rotor drones. Intel CEO Brian Krzanich will lead the Drone Advisory Council that provides suggestions to Capitol Hill on issues related to unmanned aerial systems.

[See: High-Tech Investing: 7 Sectors to Watch.]

"Intel is playing a huge role and a lot of people aren't talking about them," Smith says. "But they are taking drone technology very seriously and with a global approach."

Shenzhen, China-based Da-Jiang Innovations Science and Technology Co., or DJI, is considered the biggest player in the unmanned aerial vehicle sector.

"DJI is setting all the trends and pushing the limits constantly on themselves, which is causing everyone to not to be able to compete," Smith says.

He cites the firm's investments in gimbal technology, which helps make cameras stable, long-range transmission capabilities of more than four miles, coupled with DJI's willingness to give companies a software development kit that allows corporations to build software that can interface with DJI's hardware.

Where else to look. Think of investing in these technologies like the gold rush of the 1800s, where most of the people didn't actually make money on finding gold but by selling supplies the tools and pick axes, Palermo says.

"Look at the companies who are making imaging components for the drone makers," he says.

Look toward the software companies focused on artificial intelligence, including machine learning and computer vision from drone-produced data, Smith says.

"Companies are realizing that the hype around drone hardware is misplaced," says Suzanne El-Moursi, CEO of Uplift Data Partners in Chicago. "The value provided by drones is in the insights that are extracted from their data, and the opportunity for innovative data processing products that unlock these insights."

What else to consider. The PureFunds Drone Economy Strategy exchange-traded fund ( IFLY), which launched in March 2016, focuses on the commercial drone market and includes companies such as AeroVironment ( AVAV), French-based Parrot, Boeing, GoPro and Ambarella ( AMBA). More than half of the portfolio is focused on aerospace and defense industry within the U.S. It carries an expense ratio of 0.75 percent and has $9.32 million in assets.

Industries are using UAV technology to obtain views of construction sites, farm fields, mines and quarries.

[Read: High-Tech, Low Returns.]

"It's becoming less about how cool it is to use a drone," Smith says. "And more about bringing true efficiency and cost-cutting measures to business."

Dawn Reiss is a Chicago-based freelance business and finance reporter at U.S. News & World Report. An award-winning journalist, her work has appeared in dozens of national outlets including Time, Time.com, Fortune.com, USA Today, The Atlantic, Reuters, AFAR, Travel + Leisure, Chicago Tribune and Civil Eats. She spent four months driving to every NFL city in the country for The Sporting News and has worked as a staff writer at the Dallas Morning News and St. Petersburg Times. She served as president of the Chicago Headline Club, the largest Society Professional Journalist chapter in the country, has taught magazine reporting at DePaul University and served as managing editor of several magazines. She's a 2016-17 Social Justice News Nexus Fellow at Northwestern University, a 2017 Reynolds Week Fellow for business journalism and a member of American Society of Journalists and Authors. You can follow her on Twitter, Instagram, find her on the Web or email her at dreiss100@gmail.com.