This year’s Farnborough International Airshow attracted a record 1,636 exhibitors. But perhaps a more telling statistic was the 60/40 split between defence and civil aviation contractors. It’s normally right down the middle, but the widespread perception is that security threats are multiplying, so prominent Nato members are looking to beef up their defence capabilities for the first time since the end of the cold war.

Samira Braund, defence director of UK aerospace trade organisation (and organiser of the Farnborough International Airshow) ADS, told Investors’ Chronicle that military innovation was “happening on an almost week-by-week basis” and we were in one of the “most transformative periods … in modern defence”. The deployment of low-cost uncrewed aerial vehicles (UAVs) and ballistic missile barrages would dictate defence spending allocations, she added.

This has been at the forefront of investors, military personnel and defence contractors’ minds this year, given the economics of bringing down one of Iran’s Shahed-136 drones, worth around $50,000 (£36,800), with a £2mn-plus MIM-104 Patriot missile. There’s a demonstrable gap in capabilities between the two weapons systems, but success in warfare can often be judged by how long it can keep a combatant in the fight, especially if their adversary’s kit is priced at the upper end of the cost curve. Michael Horowitz from the Council on Foreign Relations said: “Even if each system is not as capable as the exquisite equivalent that the US employs now – think fighter jets or submarines – they offer enormous striking power at a much lower cost.”

This era has been termed “precise mass” weaponry – cheaply manufactured, high-volume systems that can incorporate AI and advanced targeting. Throw in the readily accessible threat of electronic and cyber warfare, and you have all the ingredients needed to level the playing field in modern conflicts.

The focus on affordable, high-impact systems has brought non-military and commercial technology companies into the market and raised the profile of smaller defence contractors across the globe. The democratisation of the battlefield has not only informed tactical thinking; it has posed a challenge and an opportunity for “big-ticket” defence contractors, all of which were out in force in Farnborough.

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Are US defence stocks leading on innovation?

Lockheed Martin (US:LMT), the world’s biggest defence contractor, unveiled a counter-drone system which can apparently knock out up to 50 enemy drones in a single outing. The new Morfius X-Rotor is a ground-launched system designed to be sent up to “neutralise” large enemy drone swarms.

BAE Systems (BA.) and RTX (US:RTX) have also developed and manufactured counter-drone systems, highlighting an age-old cycle where every defensive innovation drives the creation of corresponding countermeasures.

Braund pointed to another significant technological shift, which will undoubtedly feature counter-uncrewed aerial systems technologies.

BAE also chose Farnborough to unveil the UK’s first uncrewed autonomous collaborative combat aircraft, a high-end UAV which offers 70–80 per cent of the electronic warfare and strike capabilities of a modern combat aircraft, but at around a quarter of the cost. Clearly, the onus is on achieving more with less, but as defence forces rush to bolster their UAV capabilities, there is no shortage of ways for investors to gain exposure.

Beyond the aforementioned heavyweights, AeroVironment (US:AVAV) and Northrop Grumman (US:NOC) have advanced expertise in this space, but there are potentially higher-growth contractors worth considering.

Nasdaq-traded Red Cat (US:RCAT) is a pure-play option for investors, albeit those with heightened risk tolerance. The company develops drone and robotic hardware and software for the defence industry. It has yet to turn a profit, but revenues have risen sevenfold since 2024 on the back of rising sales of its Black Widow and FlightWave drones to the US military and Nato allies.

Investors may baulk at committing to the company based on its working capital movements alone, to say nothing of its capital cycle. Put simply: there’s a reason it trades at a 64 per cent discount to the FactSet consensus target rate.

The risk/reward dynamic for a company like Red Cat isn’t for everyone. It may be possible, however, to capture a meaningful share of the subsector gains through pooled investments.

Defiance Drone ETF (DRN), run by HanETF and launched earlier this year, tracks the VettaFi Drone index. It offers exposure to global companies involved in UAVs across military and civilian applications. Broader exposure to frontier tech fields can be had through WisdomTree Physical AI, Humanoids and Drones ETF (WPAI). Total annual expense ratios for the two funds come in at 0.69 and 0.45 per cent, respectively.