Should You Buy, Or Sell Fidelity’s MSCI Industrials Index ETF (FIDU) Today?

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Should You Buy, Or Sell Fidelity’s MSCI Industrials Index ETF (FIDU) Today?

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The Fidelity MSCI Industrials Index ETF (FIDU) has delivered a 9.13% year-to-date return as industrial companies benefit from the use of AI infrastructure, although the author recommends selling FIDU for targeted industrial exposure; Nvidia (NVDA) makes up about 8% of the S&P 500 with technology at 35% of the index, creating concentration risk that makes industrial stocks the safest during a possible AI-related selloff.
Hyperscalers’ big spending for AI buildout is flowing straight to industrial companies that make building materials, appliances, and HVAC systems, positioning industrial stocks to outperform over the next few years despite broader market convergence.
The analyst who called NVIDIA in 2010 recently named his top 10 stocks and the Fidelity MSCI Industrials Index ETF was not one of them. Get them here for FREE.

I Fidelity MSCI Industrials Index ETF (NYSEARCA:FIDU) It’s a low-cost ETF that gives you exposure to some of the best industrial and defensive stocks in the market. Many investors consider it a strong play due to heavy spending on defense and industrial restructuring. And while that hasn’t paid off since the S&P 500 is ahead, I’d argue that FIDU deserves a second look.

The future could be bright for FIDU for many reasons, and some unique factors could turn it into a winner.

Industrial stocks are very strong in the current environment. Also, you may be underweight them by a large margin, and you may miss out on a lot if reshoring + reindustrialization plays out as expected in the coming years.

The analyst who called NVIDIA in 2010 recently named his top 10 stocks and the Fidelity MSCI Industrials Index ETF was not one of them. Get them here for FREE.

But even all that may not make the purchase in the end. Let’s first look at what’s going on.

FIDU is doing better and better

Past performance may turn some people off just because this ETF is underperforming, but this is a mistake. In fact, I find it impressive that FIDU has been able to nearly keep pace with the S&P 500 and has actually delivered higher year-to-date returns this year at 9.13% versus 5.8%.

FIDU shares have been through a cycle of record high interest rate hikes, and tax drama. The S&P 500 did the same, but the industrial sector didn’t have Wall Street to throw money at it because of AI.

Things are changing though. The premium Wall Street is paying for AI is moving from software technology companies to hardware businesses and industries that are on the receiving end of building capital.

Why FIDU is set to continue to work well

Hyperscalers are posting strong earnings results and revenue growth metrics today, but the real cost of this build is in the cash flow and balance sheet categories as earnings tend to spread out costs.

If you look at the cash flow, you will see that many of them have huge debts, while others are struggling. Free cash flow continues to decline due to increased capex.

Where does all this money go? Right here, at least a good part of it. FIDU has 364 factories. This includes construction companies, electrical component manufacturers, HVAC cooling companies… This structure affects many industries. I wouldn’t be surprised if this translates to FIDU’s efficiency going over a few more years.

Technology can go wrong, but industry (probably) won’t

Industrial stocks have been largely in line with the broader indexes over the past few years. You won’t see amazing performance, but what you will see is more security. Nvidia (NASDAQ:NVDA) alone now makes up about 8% of the S&P 500, with the broader technology sector weighting at 35%. AI is unlikely to run out of steam anytime soon, but if it does, you’re in a lot less trouble if you’re invested in FIDU.

But again, you will still have market correlation because of how many assets this ETF holds. For example, FIDU declined as did SPY in 2022, although it quickly recovered. The lack of technology stocks does not mean that this ETF survived the sell-off that occurred after the technology bubble of 2021.

Similarly, you can argue that the same AI selloff will not save the industry. I was going to disagree and say that you will see FIDU drop much lower than Spy, as industrial companies are sitting on more cash compared to their tech counterparts.

Should you continue shopping?

No.

I said that this ETF is doing better and better and will even outperform the S&P 500 this year and maybe next year, but that is not a reason to buy. Sure, it’s doing well, but is it doing well enough to devote a reasonable portion of your portfolio to it? I do not think so.

A small number of industrial stocks here leads to more declines in industrial stocks that you should be targeting. As I mentioned earlier, this AI structure affects many industrial shares; you should focus on the specific stocks that are profitable instead of trying to buy the entire sector.

So, I will sell FIDU and buy something like Shares of Defiance AI & Power Infrastructure ETF (NASDAQ:AIPO). This ETF is 58% industrials, less than 20% tech, and is up 45% year to date.