The Industrial Select Sector SPDR Fund (NYSEARCA:XLI) is the default way most investors own U.S. industrials. It holds the industrial names in the S&P 500, providing broad exposure to aerospace, machinery, railroads, and defense at a low cost. XLI has done its job over the last year, returning 24.05% through July 7, 2026. The trouble is that a large share of the industrial rally has been driven by one narrow theme, and XLI dilutes it. A more concentrated infrastructure fund captured a larger share of the same wave.
Why XLI Still Makes Sense for Most Holders
XLI is cap-weighted across S&P 500 industrials, meaning its top 10 holdings account for 41.00% of assets, led by Caterpillar at 7.74%, GE Aerospace at 6.85%, and GE Vernova at 5.37%. The fund holds 84 positions across transportation, defense, and manufacturing, with $31.07 billion in assets. That breadth is why people buy it. If the reader wants a diversified industrial sector proxy, XLI does that cleanly.
The premium comes with a price. XLI trades at a 30 P/E ratio, reflecting how much growth expectation is already priced into the sector. Aerospace and defense names carry significant weight, but they respond to different cycles than the data center build-out does.
The Gap: AI Capex Runs Through Infrastructure
The biggest story in industrials right now sits on the utility and construction side. The Department of Energy projects data centers will account for up to 12% of U.S. electrical demand by 2028. Goldman Sachs notes that U.S. power grid assets average 40 years old, creating a structural mismatch with AI compute demand. That capex flows to electrical equipment makers, utility contractors, engineering firms, and materials suppliers. XLI owns some of these companies, but they compete for weight with Boeing, Uber, and defense primes.
PAVE: The Same Theme, Concentrated
The Global X U.S. Infrastructure Development ETF (NYSEARCA:PAVE) is built to hold companies tied to physical infrastructure buildout. Over the last year, PAVE returned 28.23%, ahead of XLI’s 24.05%. Over five years, the gap widens: 131.44% for PAVE against 93% for XLI. The edge is real, and it comes from what the fund owns.
PAVE’s top positions include Quanta Services at 3.372%, an electrical contractor that builds transmission lines, and Eaton at 3.159%, which supplies power distribution equipment for data centers. Trane Technologies accounts for 3.329% in HVAC systems, and railroads, including Union Pacific, CSX, and Norfolk Southern, each hold roughly 3.2% weight. The fund manages $12.4 billion in net assets as of February 28, 2026.
The mechanism is straightforward: when a hyperscaler commits capex to a new data center, the money flows to substation equipment, cooling systems, aggregate suppliers, and the contractors who run the wire. PAVE overweights those categories. XLI includes some of the same names, but it competes for shelf space with unrelated industrials.
The Tradeoffs and How to Approach the Swap
This is a narrower bet with PAVE. If AI capex slows or utility permitting stalls, it will feel it more than XLI. Neuberger Berman flagged this risk directly, warning investors to watch for strained free cash flows at companies deploying massive capex. It also skews smaller in market cap, which typically means higher volatility. And in the last week, it fell 4.21% against XLI’s 1.54% decline, showing the fund cuts both ways. XLI still owns aerospace and defense exposure that PAVE does not.
A holder who wants industrials broadly, including the defense cycle, would lose that by swapping out entirely. The cleanest approach for most holders is a partial reallocation rather than a full swap. Moving a portion of an XLI position into PAVE tilts the industrial sleeve toward infrastructure without abandoning the broader exposure. In a taxable account, capital gains on a full XLI sale could be meaningful given the sector’s run, so partial trimming or directing new contributions into PAVE could help avoid that friction. In a retirement account, the mechanics are simpler.
Where This Leaves the Decision
XLI is doing what it is designed to do, but the real question is whether that design matches what the reader is trying to capture. If the goal is broad industrials, XLI remains the cleaner tool. If the goal is exposure to the physical layer of the AI build-out, PAVE has delivered stronger returns over one- and five-year periods, and its holdings make that difference clear. The swap is worth weighing against the reader’s tax situation, time horizon, and comfort with a more concentrated position.
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