Artificial intelligence (AI) could be one of the most valuable opportunities in history for investors, and the semiconductor industry is at the heart of it. Nvidia (NVDA +0.84%) CEO Jensen Huang believes there is a whopping $1 trillion worth of existing data center infrastructure that must be upgraded with new chips to support demand from AI developers.
Nvidia is leading the charge right now, but it won't be the only beneficiary of that opportunity. However, rather than trying to pick which stocks might be the winners and losers over the long term, investors should consider buying an exchange-traded fund (ETF) instead.
The iShares Semiconductor ETF (SOXX +3.52%) is a specialized fund that invests exclusively in the world's top chip companies, and Nvidia is its largest holding.
Image source: Getty Images.
The iShares Semiconductor ETF (SOXX) just completed a stock split
The SOXX ETF delivered a spectacular compound annual return of 30.4% over the last five years. That's almost triple the yearly return in the S&P 500 index over the same period.
In fact, the SOXX ETF recently soared to $680 per share, which made it somewhat inaccessible to smaller investors. As a result, iShares executed a 3-for-1 stock split in March, which increased the number of SOXX shares in circulation threefold, bringing its stock price down by two-thirds organically. It had no impact on the underlying value of the ETF, but it means investors can now buy in for as little as $217 (as of this writing).
Considering the substantial AI opportunity ahead for the chip sector, the momentum in the SOXX ETF will likely continue long into the future. Here's how it could turn an investment of $200,000 into $1 million in 10 years -- but don't fret, investors with any amount of starting capital can benefit from a fivefold return if this opportunity pans out.
NASDAQ: SOXX
Key Data Points
Every leading chip stock, conveniently packed into one ETF
Nvidia designs some of the world's most powerful graphics processing units (GPUs) for AI workloads. They are fitted inside centralized data centers operated by tech giants like Microsoft and Amazon, which in turn sell the computing power to developers so they can build, train, and deploy their AI models.
Nvidia's industry-leading H100 GPU drove the company's data center revenue to a year-over-year increase of 217% in fiscal 2024 (ended Jan. 28) to $47.5 billion. That piece of hardware is the primary reason Nvidia is now a $2.2 trillion company -- and considering the new, more advanced H200 GPU is now shipping, the momentum will likely continue.
The SOXX ETF owns stakes in 30 different chip companies, but it's heavily weighted toward its top five holdings, which account for 35.4% of the total value of its portfolio:
|
Stock |
SOXX ETF Weighting |
|---|---|
|
1. Nvidia |
8.88% |
|
2. Broadcom (AVGO +0.21%) |
8.28% |
|
3. Qualcomm |
6.57% |
|
4. Advanced Micro Devices (AMD +4.69%) |
6.55% |
|
5. Micron Technology (MU +6.10%) |
5.08% |
Data source: iShares. Portfolio weightings are accurate as of April 26, 2024, and are subject to change.
The ETF's second-largest holding is Broadcom, which is a leader in networking and connectivity hardware for data centers. Its Tomahawk 5 switch, for example, is designed to speed up how quickly data travels from one point to another, which is critical in data centers with thousands of GPUs ingesting mountains of information every second. Broadcom also develops AI software on several fronts through its subsidiaries, including VMWare and Symantec.
Advanced Micro Devices is another key holding for the SOXX ETF. The company recently launched its MI300 data center chips to compete with Nvidia, and they have already attracted big customers like Microsoft, Oracle, and Meta Platforms. Plus AMD is a leader in the emerging AI-enabled personal computing market. Millions of notebooks and devices have already been sold with the company's Ryzen AI chips.
Rounding out the top five is Micron Technology, which is a leading producer of memory (DRAM) and storage (NAND) chips. Its HBM3E memory solution was selected by Nvidia to power the new H200 GPU, primarily because of its incredible efficiency. It consumes 30% less power than competing solutions, which is a key consideration for data center operators because electricity is one of their largest costs.
Outside of the top five, the SOXX ETF owns popular chip stocks like Intel and Texas Instruments. It also has a stake in Taiwan Semiconductor Manufacturing, which is responsible for making more than half of the world's chips, including those designed by Nvidia and AMD.
The SOXX ETF could turn $200,000 to $1 million in a decade
The SOXX ETF has gained 53.5% over the past year, which crushes the 22.3% return of the S&P 500, and even trounces the 33.9% return of the technology-heavy Nasdaq-100 index.
And that outperformance isn't an anomaly. The ETF delivered a compound annual return of 30.4% over the last five years, and 25.3% over the last 10 years. Technologies like cloud computing and AI have only gone mainstream over the past decade, which explains the incredible performance.
Besides Jensen Huang's forecasted $1 trillion opportunity for the data center industry, every computer and device could also be fitted with AI capabilities over the long term, so continued market-beating returns in the SOXX ETF is a real possibility.
But even if the SOXX ETF delivered a more moderate annual return of 15% over the next 10 years, it would still lead to significant financial gains for investors. The table below shows how different returns would affect an initial investment of $200,000:
|
Initial Investment |
Compound Annual Return |
Balance After 10 Years |
|---|---|---|
|
$200,000 |
15% |
$809,111 |
|
$200,000 |
20% |
$1,238,347 |
|
$200,000 |
25% |
$1,862,645 |
|
$200,000 |
30% |
$2,757,169 |
Calculations by author.
The SOXX ETF is a great way for investors to play the AI opportunity over the long term, especially after its recent stock split, which makes it far more accessible to those of all experience levels.
