In 2024, the global semiconductor (or chip) market is projected to grow more than 13% to nearly $600 billion, according to the Semiconductor Industry Association. Moreover, this market should reach $1 trillion in revenue by 2030, per top consulting firm McKinsey & Company. These rosy growth projections are being driven by several massive global trends that are in their early innings, including artificial intelligence (AI), vehicle electrification, and autonomous driving, according to McKinsey.
Buying Nvidia (NVDA 0.19%) stock is one way to gain exposure to these trends. The company's graphics processing unit (GPU) chips have a dominant share of the data center AI market, whose growth has greatly accelerated due to generative AI. (This is the tech behind OpenAI's incredibly popular chatbot, ChatGPT.) And while Nvidia's auto business is still relatively small, it has the potential for huge growth once driverless vehicles become legal across the United States and beyond.
Some investors are understandably hesitant to buy Nvidia stock after its rapid run-up. The stock has soared 233% and 480% over the last year and three years, respectively, as of April 12. One great way to get considerable exposure to this top-performing stock but with less risk than buying it is to invest in an exchange-traded fund (ETF) that is heavily weighted with Nvidia stock: VanEck Semiconductor ETF (SMH 0.36%).
VanEck Semiconductor ETF: The best-performing semiconductor ETF
Among semiconductor ETFs with at least a three-year trading history, the VanEck Semiconductor ETF has the best returns over the short, medium, and longer terms.
The VanEck Semiconductor ETF began trading in December 2011, so it has a solid track record, at least compared other semiconductor ETFs. It's easily outperformed the S&P 500 index (widely considered the best proxy for the overall U.S. stock market) over the short, medium, and longer terms, as shown below.
|
ETF/Index |
Year-To-Date 2024 Return |
1-Year Return |
3-Year Return |
5-Year Return |
10-Year Return |
|---|---|---|---|---|---|
|
VanEck Semiconductor ETF |
26.2% | 77.4% | 78.4% | 305% | 1,030% |
| S&P 500 | 7.9% | 27.2% | 30.1% | 91.6% | 240% |
Data source: YCharts. Data as of April 12, 2024.
VanEck Semiconductor ETF: The basics
The VanEck Semiconductor ETF is an index fund that's designed to track the performance of the MVIS US Listed Semiconductor 25 Index. This index consists of a portfolio of worldwide companies involved in the semiconductor value chain -- from chip design and production to the manufacturing of equipment used for making chips. As this index's name suggests, it has 25 stock holdings and all the stocks are listed on a major U.S. stock exchange.
It's a positive that the index upon which this ETF is based favors large companies, in my view. Large companies in the semiconductor space benefit from economies of scale, including usually having greater bargaining power with suppliers and subcontractors than their smaller peers.
This ETF has a reasonable total expense ratio of 0.35%.
VanEck Semiconductor ETF: Top 10 stock holdings
|
Holding No. |
Company |
Market Cap |
Wall Street's Projected Annualized EPS Growth Over Next 5 Years |
Weight (% of Portfolio)* |
5-Year Return |
|---|---|---|---|---|---|
|
1 |
Nvidia |
$2.2 trillion |
37.9% |
20.39% |
1,770% |
|
2 |
Taiwan Semiconductor Manufacturing (TSM -0.07%) |
$739 billion |
4.3% |
12.70% |
282% |
|
3 |
Broadcom | $623 billion | 14.4% | 7.93% | 398% |
|
4 |
ASML Holding | $378 billion | 21.7% | 4.93% | 401% |
| 5 | Micron Technology | $136 billion | (2.6%) | 4.72% | 197% |
|
6 |
Qualcomm | $191 billion | 8.3% | 4.68% | 240% |
|
7 |
Applied Materials | $173 billion | 14.3% | 4.51% | 410% |
| 8 | Lam Research | $125 billion | 9.4% | 4.50% | 428% |
|
9 |
Texas Instruments | $151 billion | 10% | 4.47% | 63.7% |
|
10 |
Advanced Micro Devices (AMD 2.03%) | $264 billion | 25% | 4.04% | 486% |
|
Total Top 10 |
N/A |
N/A |
N/A |
72.87% |
N/A |
|
Overall ETF |
N/A |
Total net assets of $18.8 billion |
N/A |
100% |
305% |
|
N/A |
S&P 500 |
N/A |
N/A |
N/A |
91.6% |
Data sources: VanEck Semiconductor ETF, Yahoo! Finance, and YCharts. EPS = earnings per share. *Portfolio weight as of April 11, 2024. All other data as of April 12, 2024.
The 10 top holdings above fall into these broad categories:
- Chip producers: Nvidia (No. 1), Broadcom (3), Micron (5), Qualcomm (6), Texas Instruments (9), and Advanced Micro Devices (10).
- Foundries: Taiwan Semiconductor Manufacturing (2). TSM produces chips for companies that contract out some or all their chip manufacturing. Nvidia is one such company. It's a so-called "fabless chip maker" because it doesn't do any of its chip fabrication in-house. Indeed, Wall Street analysts estimate that Nvidia was TSM's second-largest customer in 2023. So TSM is benefiting significantly from Nvidia's incredible growth.
- Semiconductor equipment manufacturers: ASML (4), Applied Materials (7), and Lam Research (8).
What data pops out at you in the above table other than the stock performance data? Perhaps one or both items:
- Largest holding: Nvidia is not only the ETF's largest holding, but it is by far the heaviest weighted. This is a positive if you want considerable exposure to this top-performing stock, but are hesitant to buy it for whatever reason. That could include being concerned it's run up too quickly and is overvalued, or you might simply prefer investing in baskets of stocks within an industry rather than in individual stocks.
- Best projected earnings growth: Nvidia and Advanced Micro Devices (AMD) are projected by Wall Street analysts to have the best average annual earnings growth over the next five years. These two companies are the No. 1 (by far) and No. 2, respectively, producers of discrete GPUs. GPUs are the favored chips for training artificial intelligence models and running AI applications in data centers. Given the rapid adoption of AI by companies and other entities, it makes sense that Nvidia and AMD have the highest consensus earnings estimates.
A great ETF for investing in the AI and other humongous global growth trends
The semiconductor industry is poised for decades of strong growth, thanks to several humongous global growth trends that are in their early stages, including AI, the electrification of the world's vehicle fleet, and autonomous driving.
The VanEck Semiconductor ETF is an attractive way for investors to invest in these trends. Its diversification makes it a less risky way to gain exposure to the chip space, relative to buying individual stocks.
