On May 20, CFRA upgraded the Industrials sector to overweight from marketweight, while downgrading Financials to marketweight from overweight. The Industrials upgrade reflects CFRA’s view that the sector is likely to benefit from a capital expenditure (capex) Supercycle, which spans AI-driven data center buildouts and grid electrification, defense spending, and a renewed focus on U.S. domestic manufacturing. Investors can access U.S. Industrials firms across the market-capitalization spectrum with a low-cost indexed ETF like the Vanguard Industrials ETF (VIS). VIS could serve as a core portfolio holding for investors to access the secular tailwinds in heavy manufacturing, defense, and capital goods.
In addition, investors can consider specialized thematic ETFs focused on grid modernization and transatlantic defense. The First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID) and Themes Transatlantic Defense ETF (NATO) have high ratings from CFRA and could serve as satellite holdings to get a tilt toward growing industries in the Industrials sector.
Vanguard Offers Cheap Beta Exposure to U.S. Industrials Firms
Vanguard’s VIS spans asset-heavy businesses that are likely beneficiaries of the current AI buildout, while also being less vulnerable to direct disruption from generative AI. CFRA upgraded VIS’s largest holding Caterpillar Inc. from a Sell to a Buy on May 3, 2026, due to the firm’s record order backlog. These orders are driven by robust demand for prime and backup power generation within data center markets. The rapid growth in high-performance computing and cloud storage has accelerated demand for CAT’s gas generators that help power data centers and avoid total energy loss. Other top holdings in VIS (see Table 2) include GE Aerospace and GE Vernova Inc. CFRA currently maintains a Buy rating on GE due to its exceptionally strong fundamentals, including a $170 billion commercial services backlog providing multiyear revenue visibility. GE has dominant market positions across both narrow-body and wide-body propulsion segments. RTX Corporation and The Boeing Company round out the top five holdings in VIS, with both benefiting from increased global defense spending.
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Providers of “Picks and Shovels” for Grid Modernization
First Trust’s GRID provides targeted exposure to global firms likely to benefit from the upgrading of power infrastructure in response to the energy demand driven by AI. As of May 29, 2026, GRID had 63.3% of its portfolio in Industrials stocks, with 18.8% in Utilities and 13.3% in Information Technology. The common theme for the stocks across these sectors is that many are beneficiaries of capex cycles, as hyperscalers drive critical upgrades to transmission lines, metering, and power management hardware. The largest holding in GRID, ABB Ltd, is seeing persistently high demand for its electrification products from key secular growth markets, particularly data centers and utilities investing in grid stability. This demand from data centers has also benefited Eaton Corporation plc, which is capturing demand by providing critical “grid-to-chip” infrastructure, manufacturing everything from high-voltage utility transformers to specialized power distribution systems. Schneider Electric S.E., another large holding in GRID, delivered a strong Q1 2026 performance, with revenues of EUR9.8 billion (up 11.2% organically) and energy management growing 12.8%.
GRID appreciated 27.0% year-to-date through May 27, driven by strong returns in global equipment manufacturers and engineering firms. ABBN accounted for 3.4% of GRID’s YTD returns, and ETN was also a top-five contributor to the ETF’s YTD return. Other leading contributors to GRID’s YTD returns include power and telecom cables and systems provider Prysmian S.p.A and Quanta Services Inc., which offers end-to-end network solutions to the electric power, natural gas, and cable TV industries.
Further Upside in Defense ETFs Despite Run-Up
CFRA believes NATO still has further room for price appreciation, despite its run-up in the last 18 months (see Figure 1), due to a secular trend in transatlantic defense spending and commercial aircraft manufacturers ramping up new plane production. The three largest holdings in the ETF are GE, BA, and RTX, which all have Buy ratings. As one of two major commercial aircraft duopolists, BA maintains structural advantages, with total company backlog reaching a record $695 billion. CFRA upgraded RTX from Hold to Buy on April 22, 2026, based on exceptional Q1 2026 execution, landmark defense framework agreements that provide unprecedented revenue visibility, and accelerating margin expansion that demonstrates operational leverage across all segments. CFRA also has a Buy rating on Honeywell International Inc., which is pursuing the separation of its automation and aerospace businesses, a move that CFRA views as unlocking significant value for shareholders via a simplified operating structure and optimized capital allocation alignment.
Looking Ahead
The long-term structural tailwinds benefiting VIS, GRID and NATO appear to be insulated from near-term cyclical downturns, since many firms held in the ETFs have strong order backlogs and revenue visibility. The electrification needs of AI firms and geopolitical fragmentation driving national defense spending should continue to support these ETFs. However, investors will also need to balance valuation risks against the secular growth from these shifts. A specific metric that investors will need to monitor is hyperscaler capex spending, since many of the firms held in these ETFs are downstream beneficiaries of that trend.
