2 Industrial Mutual Funds to Grab as Cyclical Tailwinds Build

U.S. industrial stocks have started 2026 on a firm footing, supported by improving activity data and renewed investor interest in cyclical sectors. Against this backdrop, the Industrial Select Sector SPDR Fund (XLI) has gained about 5.4% year to date as of Jan. 20, reflecting confidence that industrials can hold up despite intermittent market volatility.Recent economic indicators have helped underpin the sector’s performance. U.S. industrial production recorded a healthy increase in December, while capacity utilization moved higher, pointing to better-than-expected factory activity. Although several manufacturing surveys continue to signal uneven demand and lingering caution among businesses, actual output data suggest that core industrial operations remain resilient. This has bolstered expectations for companies involved in machinery, transportation, aerospace and electrical equipment, which account for a substantial share of XLI’s holdings.Structural themes have also played an important role. Greater focus on reshoring and supply-chain diversification has encouraged capital spending, while sustained investment linked to infrastructure, defense and energy transition projects has provided longer-term visibility for industrial demand. These trends have helped investors look beyond near-term economic uncertainty and view industrials as beneficiaries of multi-year spending cycles.Market positioning has further supported the sector’s advance. With valuations in some growth-oriented sectors appearing stretched, investors have rotated selectively into industrial stocks that offer more reasonable pricing and leverage to economic improvement. This combination of supportive production data, longer-term industry tailwinds and shifting investor preferences has allowed XLI to post solid gains early in 2026, even as broader markets remain sensitive to macroeconomic and geopolitical developments.Hence, astute investors might consider such funds at present. Mutual funds, in general, reduce transaction costs and diversify portfolios without an array of commission charges that are mostly associated with stock purchases (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).We have thus selected two industrial mutual funds that boast a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy), have positive three-year and five-year annualized returns and minimum initial investments within $5000, and carry a low expense ratio.Fidelity Select Materials FSDPX primarily invests in common stocks of companies involved in the production, mining, processing, or distribution of raw materials and intermediate goods, including both domestic and foreign issuers, selected through fundamental, market and economic analysis.Ashley Fernandes has been the lead manager of FSDPX since April 2022. Three top holdings for FSDPX are 16.6% in Linde, 8.5% in Ecolab and 5.2% in The Mosaic. Of the fund, 74.8% is dedicated to the Industrial Cyclical sector.FSDPX’s 3-year and 5-year annualized returns are 5.1% and 6.6%, respectively. Its net expense ratio is 0.69%. FSDPX has a Zacks Mutual Fund Rank #2. To see how this fund performed compared to its category, and other 1 and 2 Ranked Mutual Funds, please click here.Fidelity Select Defense & Aerospace FSDAX mainly invests in common stocks, focusing on companies involved in the research, production, or sale of defense and aerospace products or services. FSDAX advisors apply fundamental analysis, evaluating financial health, industry standing and broader market conditions to guide investment decisions.Clayton Pfannenstiel has been the lead manager of FSDAX since December 2021. Three top holdings for FSDAX are 19.8% in GE Aerospace, 16.2% in Boeing and 9.8% in Raytheon. Of the fund, 56.5% is dedicated to the Industrial Cyclical sector.FSDAX’s 3-year and 5-year annualized returns are 26.4% and 17.8%, respectively. Its net expense ratio is 0.64%. FSDAX has a Zacks Mutual Fund Rank #2.Want key mutual fund info delivered straight to your inbox?Zacks' free Fund Newsletter will brief you on top news and analysis, as well as top-performing mutual funds, each week. Get it free >>Zacks' Research Chief Picks Stock Most Likely to "At Least Double"Our experts have revealed their Top 5 recommendations with money-doubling potential – and Director of Research Sheraz Mian believes one is superior to the others. Of course, all our picks aren’t winners but this one could far surpass earlier recommendations like Hims & Hers Health, which shot up +209%.See Our Top Stock to Double (Plus 4 Runners Up) >>Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. 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