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Despite the threat of economic slowdown and high-interest rates, the US industrials sector delivered a solid performance in fiscal 2025, beating the S&P 500 and MSCI USA indices. The sector is expected to accelerate its growth in 2026 amid the favorable market conditions. The robust US GDP growth rate along with rate cuts is likely to translate into mid-teen percentage earnings growth for the industrials sector. Therefore, I initiate coverage of Fidelity MSCI Industrials Index ETF (FIDU) with a buy rating. My price target for FIDU is $102 per share, implying nearly 20% upside from the current level.

The Industrials Sector Growth Is Expected To Accelerate in 2026

FIDU total return (Seeking Alpha)

The US industrials sector outshone the S&P 500 index and MSCI USA Index in fiscal 2025 as stronger than expected economic growth supported the sector’s performance. In addition, an unprecedented demand in the aerospace & defense industry contributed significantly to the sector’s uptrend. Fidelity MSCI Industrials Index ETF delivered nearly 19% in total return, comprising 17% in price and 2% in dividend return.

I expect FIDU to deliver nearly 20% in price return and 22% in annual total return in 2026. My price target and total return estimates are in line with its three-year annual average. In the past three years, FIDU generated a total return of 68%. I attribute my price target estimate to the economic trends, easing monetary policy, and robust earnings growth power. In fact, the fund could surpass its annual average because of the more favorable conditions in 2026 compared to the past few years.

The Industrials is a cyclical sector, as its performance is significantly correlated to the broader economic conditions and rate policies. The economic expansion increases demand for industrials products and services, while contraction can negatively impact its performance.

Favorable Market Conditions and Earnings Growth Power

US GDP growth (Trading Economics)

In the last few years, the US economic growth was resilient despite multiple risks, growing around 2.5% in 2023 and 2.8% in 2024. The US GDP is expected to increase 3% in 2025. In the past two quarters, the growth was higher than expected, increasing around 3.8% in the second quarter of 2025 and 4.3% in the September quarter. The Atlanta Fed expects the final quarter GDP growth to be around 2.7%.

In fiscal 2026, the US economy is expected to experience a positive impact from rate cuts. A low-rate environment generally helps in increasing business activities and raising consumers spending power. The Fed rate is currently hovering in a range of 3.50% to 3.75%, down from the recent peak of 5.50% to 5.75%. The market currently expects two more rate cuts in 2026 to end the year around 3.0% to 3.25%. In addition, the risk of tariffs has also declined compared to 2025 as countries across the world seek to adjust trade policies through negotiations.

Earnings forecast 2026 (FactSet)

In the September quarter, the industrials earnings growth of 15.7% year over year topped the consensus of 7.9%. The sector’s earnings growth was driven by the defense & aerospace, ground transportation, electrical equipment, and construction & engineering industries. Moreover, the 2026 outlook also appears robust amid the consensus earnings growth forecast of 15%.

FIDU’s Diversified Portfolio Offers Broader Industrials Sector Exposure

The Fidelity MSCI Industrials Index ETF offers one of the best ways to gain significant access to the US industrials sector. The fund tracks the MSCI USA IMI Industrials 25/25 Index by using a representative sampling technique. According to FIDU’s fact sheet, the fund’s portfolio is spread across 26 industries within the industrials sector.

It offers a higher weight in the aerospace & defense, industrial machinery & supplies & components, electrical components & equipment, construction machinery & heavy transportation equipment, building products, and others.

FIDU top 10 holdings (Seeking Alpha)

FIDU’s portfolio includes large, mid, and small caps. Its portfolio comprises 363 companies, with the top 10 making-up 30%. Reviewing its top 10 holdings can also help us gauge the impact of favorable market conditions on the industrials sector.

For example, GE Aerospace (GE) is its largest stock holding. The company’s share price rallied 87% in the last twelve months, supported by a strong demand for aerospace products. In the September quarter, its revenue grew 26%, while earnings per share increased by 44% to $1.66. Furthermore, the company’s free cash flow conversion rate was around 130%. It also lifted its full-year forecast, now expecting revenue growth in the high teens to low 20s range compared to its previous guidance of mid-teen percentage growth.

BA, RTX and GE price return (Seeking Alpha)

RTX Corp. (RTX), a defense and aerospace company, also delivered an exceptional price gain of 61% in the last twelve months. It topped the September quarter estimate and raised its full-year adjusted sales outlook to the range of $86.5 - $87.0 billion, up from the previous forecast of $84.75 - $85.5 billion. Its new adjusted earnings per share outlook of $6.10 - $6.20 is higher than the previous forecast of $5.80 - $5.95.

After years of internal and regulatory challenges, The Boeing Company (BA) also begins to shine. The commercial aircraft maker’s stock price rallied 32% in the last twelve months. Its backlog grew to $636 billion, including over 5,900 commercial airplanes.

Besides the defense and aerospace, FIDU’s other top holdings also contributed to its performance. For example, Uber Technologies (UBER), a passenger transporter, saw a share price rally of 30% year-to-date amid its strong revenue and earnings growth. The company expects a 17% to 21% boost in full-year gross bookings to $52.25B to $53.75B with adjusted EBITDA growing around 31% to 36%.

GE Vernova (GEV), a heavy electric equipment maker, experienced a price gain of 80% in the last twelve months. Its orders grew 55% year over year to $14.6 billion in the September quarter, enlarging the total backlog to $135 billion. In the September quarter, its revenue increased 10% with the double-digit growth in both equipment and services segments. Its portfolio includes numerous other prominent companies, such as Parker Hannifin (PH), 3M Co. (MMM), General Dynamics (GD) and Emerson Electric (EMR).

FIDU’s other interesting characteristics include a low expense ratio of 0.08%. In addition, the fund offers a dividend yield of around 1%. It has paid dividends in the past 12 consecutive years. Moreover, FIDU’s valuations are in-line with the broader market indices. Its trailing PE is around 27x, while its price-to-book ratio is close to 5.5. Although FIDU and the broader market’s valuations are higher compared to their 5- and 10 years averages, I believe a risk of valuation burst is limited unless accompanied by other macro factors.

Risk Factors

The industrial sector can be hit harder in the case of a tariff-related war. According to the FactSet data, the term ‘tariffs’ was cited in 51 earnings calls of the Industrials sector. The Fidelity MSCI Industrials Index ETF can also respond to economic trends and interest rate policies. Its standard deviation of 12% and annualized volatility of 20% are higher than the median of all ETFs. Overall, the ETF carries an aggressive risk factor.

In Conclusion

The industrials sector’s boom is expected to intensify in 2026 as economic growth and interest rate policies favor cyclical businesses. A mid-teen earnings growth forecast for fiscal 2026 also indicates a solid growth trend. Therefore, the sector offers an opportunity for investors to earn healthy returns.

Fidelity MSCI Industrials Index ETF could be a worthwhile investment vehicle. FIDU’s portfolio exposure to large, mid, and small caps from numerous industries enables it to capitalize on bullish market conditions. Its low expense ratio, above-average liquidity, and potential to pay a decent quarterly dividend make it an interesting candidate.