Quick Read
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Fidelity MSCI Industrials Index ETF (FIDU) delivered 9.13% year-to-date returns as industrial companies benefit from AI infrastructure buildout spending, though the author recommends selling FIDU in favor of more targeted industrial exposure; Nvidia (NVDA) comprises nearly 8% of the S&P 500 with tech at 35% of the index, creating concentration risk that makes industrial stocks relatively safer during potential AI-related selloffs.
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Hyperscalers’ massive capital expenditures for AI buildout are flowing directly into industrial companies that manufacture construction materials, electrical components, and HVAC systems, positioning industrial stocks to outperform for the next couple of years despite broader market correlation.
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The Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU) is a low-cost ETF that gets you exposure to some of the premier industrial and defense stocks in the market. Most investors view it as a solid play due to surging defense spending and reindustrialization. And while that hasn’t paid off with the S&P 500 still ahead, I’d argue FIDU is worth taking a second look at.
The future could be bright for FIDU for multiple reasons, and some unique characteristics can turn it into a winner.
Industrial stocks are quite hardy in the current environment. Plus, you’re likely underweight on them by a large margin, and you could miss out significantly if the reshoring + reindustrialization plays out as expected in the coming years.
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But even all that might not make it a buy in the end. Let’s first take a look at what’s going on.
FIDU is doing better and better
The past performance might turn off some people just because this ETF underperformed a little, but this is a mistake. In fact, I find it quite impressive that FIDU has managed to almost keep up with the S&P 500 and has actually delivered higher year-to-date returns so far this year at 9.13% vs. 5.8%.
FIDU holds stocks that went through a record-high interest rate hike cycle, plus the tariff drama. The S&P 500 went through the same, but the industrial sector never had Wall Street throwing money at it because of AI.
Things are changing, though. The premium Wall Street is paying for AI is shifting away from software tech companies into hardware and industrial businesses that are on the receiving end of the buildout money.
Why FIDU is set to keep outperforming
Hyperscalers are posting solid earnings results and revenue growth metrics today, but the true cost of this buildout is on the cash flow and balance sheet sections since earnings tend to spread out the expenditures.
When you look at cash flow, you’ll notice many of them are already in net debt, while others are hurdling towards it. Free cash flow is continuously going down due to rising capex.
Where is all of this cash going? Right here, at least a good chunk of it. FIDU has 364 industrial holdings. This includes construction companies, electrical component manufacturers, HVAC cooling companies… This buildout touches a lot of industrials. I would not be surprised if this translates into FIDU outperforming for a couple more years.
Tech can go wrong, but industrials (probably) won’t
Industrial stocks have largely kept up with the broader indexes over the past few years. You’re not going to see staggering outperformance, but what you will see is more safety. Nvidia (NASDAQ:NVDA) alone now constitutes nearly 8% of the S&P 500, with the broader tech sector’s weight at 35%. AI is unlikely to run out of steam anytime soon, but when it does, you’re in for a lot less trouble if you’re invested in FIDU.
But again, you’re still going to have market correlation due to how many holdings this ETF has. For example, FIDU declined the same as the SPY did in 2022, though it recovered a little faster. The lack of tech stocks did not mean that this ETF was spared by the selloff that ensued after the 2021 tech bubble.
Similarly, you could argue that a similar AI selloff will not spare industrials either. I’d still disagree and say you’re going to see FIDU decline much less than the SPY, as industrial companies are sitting on more cash vs their tech counterparts.
Should you go ahead and buy?
No.
I did say that this ETF is doing better and better and will likely even outperform the S&P 500 this year and perhaps next year, but that’s not really a reason to buy. Sure, it’s doing well, but is it doing well enough for you to allocate a meaningful chunk of your portfolio to it? I don’t think so.
The sheer amount of industrial holdings here leads to dilution beyond the industrial stocks you should be targeting. As I said earlier, this AI buildout is touching many industrial stocks; you should be leaning into the precise stocks that are benefiting from it instead of trying to buy the whole sector.
Thus, I’d sell FIDU and buy something like the Defiance AI & Power Infrastructure ETF (NASDAQ:AIPO). This ETF is 58% industrials, less than 20% tech, and it is up 45% year-to-date.
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