How to Invest in Defense and modernization
Last updated October 2026
Short answer
You can invest in defense and modernization by buying the individual stocks that fit the thesis (LMT, RTX, NOC, GD, KTOS, PLTR, AXON, MSI, MTRN, IDCC), holding an ETF proxy like ITA, or building a focused defense and modernization portfolio in Walnut. The theme pairs the prime contractors that build the major platforms (Lockheed Martin, RTX, Northrop Grumman, General Dynamics) with a sub-angle the standard funds hold only lightly: drones and autonomy (Kratos), intelligence and targeting software (Palantir), public-safety video and radio (Axon, Motorola Solutions), and the specialty materials and communications that defense electronics depend on (Materion, InterDigital). Procurement runs on long, appropriated government cycles, which gives the revenue backlog visibility years ahead.
How does defense modernization work?
Defense modernization is the process by which governments replace and upgrade their military and public-safety capabilities: older platforms get retired, software and sensors get layered onto existing hardware, and depleted stockpiles get refilled. The defense and modernization theme on Walnut tracks the companies that supply that work in two layers: the large platform builders, and a software, drone, and specialty layer that the standard funds hold only lightly.
The primes anchor the first layer. Lockheed Martin (LMT) builds the F-35 and missiles, RTX builds Patriot air defense and Pratt & Whitney engines, Northrop Grumman (NOC) builds the B-21 bomber, and General Dynamics (GD) builds Navy submarines and Army combat vehicles. The second layer is the sub-angle that separates the theme from a plain aerospace-and-defense fund. Kratos (KTOS) builds low-cost drones such as the XQ-58 Valkyrie and hypersonic systems. Palantir (PLTR) sells the intelligence and targeting software that ties sensors and data together. Axon (AXON) and Motorola Solutions (MSI) modernize the public-safety side with body cameras, digital evidence, and mission-critical radio. Materion (MTRN) and InterDigital (IDCC) sit further upstream, supplying the specialty materials and wireless and video technology that defense electronics depend on.
How do defense companies make money?
Most defense revenue comes from government customers buying on long, planned cycles, so the income looks different from typical commercial sales. Contracts are awarded against multi-year programs, work is recognized as it is delivered, and the order backlog gives visibility into revenue years ahead. That backlog is a large part of why defense modernization names are valued on durability as much as growth.
Within the theme, the mechanics vary. The primes earn on cost-plus and fixed-price program contracts plus long sustainment tails, which funds their dividends; fixed-price programs can also produce loss charges when costs overrun. Kratos runs on thinner margins while it ramps drone and hypersonic production. Palantir earns durable government software revenue alongside faster-growing commercial work. Motorola Solutions layers recurring software and services on top of radio hardware. Axon converts device sales into subscription evidence-management revenue. Materion and InterDigital monetize qualified materials and licensed technology that are hard for customers to substitute, which is what keeps their place in the defense and modernization supply chain sticky.
What is driving defense modernization in 2026?
Several forces sustain the defense and modernization theme heading into 2026. Great-power competition and allied rearmament have lifted procurement budgets across the US and NATO, munitions and stockpiles that were drawn down in recent conflicts are being restocked, and the Pacific theater keeps long-cycle programs funded.
The newer angle is where the modernization spend is going: drones and autonomy, software-defined command and control, space-based sensing, and cyber. That is the sub-angle the theme leans into alongside the primes, whose backlogs carry the restocking and long-cycle programs. Kratos benefits from the shift toward cheap, attritable drones, Palantir benefits from the software-and-autonomy shift, Motorola Solutions and Axon benefit from public-safety modernization, and Materion and InterDigital benefit from the underlying electronics, communications, and materials demand that every one of those programs creates.
Why are defense stocks considered defensive?
Defense stocks earn the "defensive" label because their demand is set by government policy rather than the consumer economy. Appropriated budgets and multi-year backlog mean revenue tends to hold up when discretionary sectors weaken, which is why a defense and modernization allocation can behave differently from the rest of a portfolio during a downturn.
That resilience is not absolute. Defense follows policy cycles, so a budget reset or geopolitical de-escalation can compress sentiment even when backlog is full. The theme's drone, software, and specialty names (KTOS, PLTR, AXON, MTRN, IDCC) also carry more growth-stock volatility than the primes it holds alongside them, so the defensiveness of the defense and modernization theme is best understood as policy-driven stability, not a guarantee against drawdowns.
What gets a stock into the Defense and modernization theme?
Material revenue from defense and intelligence customers (US DoD, intelligence community, allied governments) or from defense-adjacent specialty materials and communications used in defense electronics.
What stocks are in the Defense and modernization theme?
Every public name that fits the Defense and modernization thesis, with the rationale for inclusion. Click any ticker for the full stock guide. The portfolio above starts equal-weighted; you set your own target weights inside Walnut.
Largest US defense prime; F-35 fighter, missiles, and space systems on a multi-year government backlog.
Patriot air defense, missiles, and Pratt & Whitney engines; a munitions-restocking and aftermarket story.
Prime on the B-21 Raider bomber and nuclear-triad modernization; long-dated strategic programs.
Navy submarine builder (Electric Boat) and Army combat vehicles, plus Gulfstream business jets.
Low-cost drones (XQ-58 Valkyrie), hypersonics, and rocket motors built for volume production.
One of the largest software vendors to the US DoD and intelligence community; durable government revenue base.
Body cameras, TASERs, and digital evidence platform serving law enforcement and emerging private security.
Land mobile radio for public safety; mission-critical communications across police, fire, and emergency services.
Beryllium-based alloys and specialty materials for defense and aerospace applications; one of few qualified Western suppliers.
Wireless and video technology research used in defense communications and standards.
How to invest in Defense and modernization
There are three broad ways to express the defense and modernization theme. The first is buying individual names. The primes in the theme (Lockheed Martin, RTX, Northrop Grumman, General Dynamics) give you large, backlog-heavy platform exposure, while the sub-angle the theme also carries (Kratos for low-cost drones and hypersonics, Palantir for intelligence software, Axon and Motorola Solutions for public-safety modernization, Materion and InterDigital for defense materials and communications) gives you the drone, software, and specialty side that the primes do not. The second is buying an ETF proxy. ITA (iShares US Aerospace & Defense) and PPA (Invesco Aerospace & Defense) are the standard passive options, but know their tilt: both are weighted heavily toward large aerospace and the primes (GE Aerospace, RTX, Boeing, Lockheed Martin, General Dynamics, Northrop Grumman), so they capture the platform builders well and the newer drone, software, and specialty layer only lightly.
The third option is building a defense and modernization portfolio in Walnut. You describe the theme to Walnut's AI assistant, for example "defense primes plus drones and intelligence software," and it proposes constituents and target weights, such as a prime core with smaller positions in the next-gen names the ETFs underweight. You fund the portfolio through your own connected brokerage, and you approve every order before it is placed. Walnut never trades for you; it builds the defense and modernization portfolio, tracks it as one performance line, and shows you the trades that would bring it to your target weights, leaving the decision with you. Walnut is not an investment adviser, so use the theme as descriptive context for your own research rather than a recommendation.
Want the full playbook? Read our step-by-step guide on how to invest in defense and modernization, covering the approaches, ETFs, and trade-offs in depth.
For the full roundup of the individual names in this theme, grouped by the role each one plays, read best defense stocks.
Which ETFs cover Defense and modernization?
If you want the theme as a single ticker rather than as a portfolio, these are the ETFs people most commonly use. Each has trade-offs (concentration, expense ratio, sector overlap) covered in the individual ETF guides.
The bottom line on Defense and modernization
Defense and modernization pairs the backlog-heavy primes (LMT, RTX, NOC, GD) with where new military spend is going (drones, autonomy, software-defined command, space sensing, and cyber) through names like KTOS, PLTR, AXON, and MSI that ITA underweights. Government budgets make it policy-driven rather than consumer-cyclical, but the drone, software, and specialty names carry growth-stock volatility, so it fits a portfolio as a satellite tilt next to a broad core, not as a standalone core holding.
FAQ
What is the defense and modernization theme?
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Defense and modernization covers companies whose revenue depends materially on US and allied defense spending. That includes software platforms used by intelligence and defense (Palantir), public safety video and communications used by law enforcement and defense agencies (Axon, Motorola Solutions), and specialty materials used in defense electronics (Materion). It also holds the prime contractors (Lockheed Martin, RTX, Northrop Grumman, General Dynamics) and a low-cost drone maker (Kratos). Unlike the standard aerospace-and-defense ETF, which is weighted toward GE Aerospace, RTX, Boeing, and the primes, the theme gives the software, drone, and specialty names six of its ten slots.
Which stocks are in the defense modernization theme?
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Ten names as of October 2026. Four primes: LMT (Lockheed Martin, F-35 and missiles), RTX (Patriot air defense and Pratt & Whitney engines), NOC (Northrop Grumman, B-21 bomber), and GD (General Dynamics, submarines and combat vehicles). Then the modernization layer: KTOS (Kratos, low-cost drones and hypersonics), PLTR (Palantir, intelligence and defense software), AXON (Axon Enterprise, body cameras and TASERs), MSI (Motorola Solutions, public safety LMR communications), MTRN (Materion, beryllium-based defense materials), and IDCC (InterDigital, wireless and video standards used in defense communications).
What are the defense primes and are they in this theme?
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The defense primes are the largest US defense contractors by revenue: Lockheed Martin (LMT), RTX, Northrop Grumman (NOC), General Dynamics (GD), and Boeing (BA), with L3Harris (LHX) and Huntington Ingalls (HII) often counted alongside them. LMT, RTX, NOC, and GD are constituents of this theme, and each has its own Walnut stock page, as do LHX, HII, Leidos (LDOS), Kratos (KTOS), and AeroVironment (AVAV). Boeing is left out because its commercial jet business drives the stock more than defense does.
What ETFs cover the defense theme?
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ITA (iShares US Aerospace & Defense) is the standard. As of October 2026 it's ~21% GE Aerospace, ~16% RTX, ~7% Boeing, then roughly 4-5% each in Howmet, Lockheed Martin, TransDigm, General Dynamics and Northrop Grumman, plus AXON and about 30 other names. PPA (Invesco Aerospace & Defense) is the second-largest passive option with similar exposure at slightly higher concentration in the top names.
Is defense modernization a good investment in 2026?
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Walnut isn't an investment adviser. Factual context: US defense budget growth has been structurally elevated since 2022, NATO members' defense spending has stepped up materially, and Pacific theater concerns sustain demand for long-cycle defense procurement. Backlog at the defense primes is at record levels. Headline risk: any geopolitical de-escalation or US budget reset narrows the multiple expansion that's been driving sentiment.
How do I invest in defense modernization?
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Two approaches. (1) Buy ITA for diversified passive exposure weighted toward large aerospace and the primes. (2) Build a Walnut portfolio from the theme's ten names, typically a core in the primes (LMT, RTX, NOC, GD) with smaller positions in the drone and software layer (KTOS, PLTR, AXON) that ITA underweights. Some investors combine the two: ITA as a core plus a thematic satellite of newer defense exposures.
Why is Palantir a defense stock?
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Palantir is one of the largest software vendors to the US DoD and intelligence community. Government revenue is the durable base of the company (commercial AIP-driven growth is what gets it the high multiple, but government is what got it the durability). The stock trades on AI commercial growth more than on defense sentiment, but the defense base is what makes it relevant to this theme.
What's the difference between Axon and Motorola Solutions?
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Axon (AXON) is concentrated in body-worn cameras, TASERs, and digital evidence software for law enforcement. Motorola Solutions (MSI) is broader, anchored by land mobile radio (LMR) systems used by police, fire, and EMS, plus public safety video and command-center software. They compete on body cameras (Motorola acquired WatchGuard and other body-cam vendors). Both qualify as defense and public-safety theme exposure with different mix and growth profiles.
How do defense budget cycles work?
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US defense spending is appropriated annually by Congress and follows long planning cycles. Procurement contracts run 5-10 years; R&D and modernization programs (F-35, Columbia-class submarines, GBSD) run 20+. The result: defense revenue tends to lag policy changes by 1-3 years on the way up and the way down. The current up-cycle started with the 2022-2023 budget process and is expected to continue through 2027 absent a major reset.
What are the risks of a defense portfolio?
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Three. (1) Budget cycle risk: a Congress or administration reset on defense spending pulls forward demand destruction. (2) Program-specific risk: individual primes are exposed to specific programs (F-35 for LMT, GBSD for NOC) that can be cut or delayed. (3) Multiple compression: defense stocks rerated up in 2022-2024 on geopolitical concerns; sentiment reversal compresses the premium even without earnings impact.
Is defense cyclical or secular?
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Defense follows policy cycles more than economic cycles. The current secular driver is real (great-power competition, NATO expansion, Pacific theater), but defense has had multi-year drawdowns following past peak-spending eras (post-Cold War 1990s, post-Iraq mid-2010s). 'Secular' for defense usually means 'multi-year sticky' not 'permanent.'
Can I build a defense portfolio in Walnut?
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Yes. Tell Walnut's AI assistant something like 'defense primes plus drones and intelligence software' and it proposes a portfolio with target weights. A typical structure holds the primes (LMT, RTX, NOC, GD) as a core, then KTOS, PLTR, and AXON as growth satellites, optionally MSI for public safety communications. You set the weights and approve every trade at your own broker.
What's the biggest defense stock?
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By market cap among the theme's names, Palantir (PLTR) is largest, at about $450 billion as of October 2026, though it trades on commercial AI growth as much as defense. Among the primes, RTX is largest at about $250 billion, then Lockheed Martin (LMT) at about $125 billion, General Dynamics (GD) at about $92 billion, and Northrop Grumman (NOC) at about $73 billion. By revenue, Lockheed Martin is the largest pure defense contractor, at about $77 billion over the trailing twelve months.
Build the Defense and modernization portfolio in Walnut
Walnut's AI assistant takes the thesis above, proposes 5 to 6 constituents with target weights, and lets you fund the portfolio through your existing broker. You approve every order; we never trade on your behalf.
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Walnut is informational, not investment advice. Theme membership is descriptive, not prescriptive; nothing on this page should be read as a recommendation. Always verify current financials and your own circumstances before investing.