One of the hottest investment themes over the last year was artificial intelligence (AI). Each of the "Magnificent Seven" stocks is playing a major role in the AI movement, and helped fuel the Nasdaq Composite to a more than 40% gain last year.
Perhaps the most scrutinized company among megacap tech is semiconductor manufacturer Nvidia. In 2023, the company witnessed a record demand for its graphics processing units (GPUs) and the stock soared nearly 240%.
However, investing in individual stocks is not for everyone. Some investors prefer to take a more passive approach, such as owning index funds. If you are interested in investing in the semiconductor industry, but prefer not to choose specific equities, the VanEck Semiconductor ETF (SMH 2.56%) may be a suitable option.
Investing just $300 per month in this exchange-traded fund (ETF) could help you build hundreds of thousands of dollars in savings in the long run -- maybe even more. Let's dig into why the VanEck Semiconductor ETF looks promising and how steady investments over a long-term time horizon can help you accumulate generational wealth.
What is the VanEck Semiconductor ETF?
Index funds are a unique vehicle because they provide investors with exposure to a specific industry, or investing theme, without owning a singular stock. Instead, index funds are constructed from a basket of different stocks -- thereby presenting investors with a fair level of diversification.
The VanEck Semiconductor ETF holds 26 different semiconductor stocks. The top 10 positions constitute nearly 70% of the portfolio and include Nvidia, Advanced Micro Devices, Taiwan Semiconductor Manufacturing, Intel, Broadcom, and Qualcomm -- a new favorite of Cathie Wood.
Image source: Getty Images.
How has the fund performed?
Given the hype around AI last year, the VanEck Semiconductor ETF's 2023 return of 73% is a bit of an anomaly. Investors are better suited looking at the returns over longer time ranges to get a sense of how well this fund is constructed, and how the semiconductor industry has performed in general.
The VanEck Semiconductor ETF has average annual returns of 17.9%, 33.2%, and 24.9% over the last three-, five-, and 10-year periods. These long-term returns handily outperform those of the S&P 500.
This dynamic may not be too surprising given technology stocks can often outperform the broader markets in any given year. However, what is more impressive is that the semiconductor industry has performed very well over the last decade -- well before AI was fueling the sector's growth.
Semiconductors are becoming increasingly used in applications such as automobiles, consumer electronics, and data centers. Research published by global management consulting firm McKinsey suggests the semiconductor industry could grow at an average annual rate of 8% and eclipse $1 trillion by 2030.
While it's difficult to forecast growth prospects decades into the future, the proliferation of generative AI and the role semiconductors currently play could bode well for consistent market-beating returns in the long run.
Should you invest in the VanEck Semiconductor ETF?
While the VanEck Semiconductor ETF's returns have provided outsize returns over the last decade, investors should be thinking about its longer-term prospects. Over the next several decades, economic cycles will experience different levels of inflation and borrowing-cost policies, impacting businesses and corporate budgets. Moreover, competition will likely rise over the long term, which could force fund managers to change weightings among the different positions in the index.
Given the overall stock market's long-term annual return of 10%, and with semiconductor demand unlikely to slow down over the next couple of decades, a conservative assumption the fund's average annual rate will be 12% over the next 30 years isn't far-fetched. The table below illustrates how a monthly contribution of $300 to this ETF can compound into hundreds of thousands of dollars over the long term at an annual return rate of 12%.
| Number of Years | Total Savings |
|---|---|
| 10 | $63,000 |
| 15 | $134,000 |
| 20 | $259,000 |
| 25 | $480,000 |
| 30 | $869,000 |
Calculations by author via Investor.gov.
The most important detail in this analysis is the holding period. While saving $300 per month can be daunting, the real challenge is continuing to invest and hold over the course of many years. This is a strategy employed by Warren Buffett -- one of the biggest proponents of leveraging compound interest.
Keep in mind that semiconductor and AI businesses are currently experiencing outsize demand. While these growth industries will likely normalize over time, I think there are long-term secular tailwinds that could fuel consistent market-beating returns over the long run. If saving more money was one of your New Year's resolutions, then a monthly contribution to this ETF might be a great place to start.