Regarding investment decisions, virtually all analysts will advise prospective shareholders not to hold just one stock.
Even if an investment thesis appears promising, a changing marketplace or poor management decisions can derail a stock's growth trajectory. Moreover, investors cannot completely rule out the possibility of fraud, as many investors learned the hard way with Enron and WorldCom at the beginning of the century.
Nonetheless, if forced to own only one stock, investors can mitigate risks with an exchange-traded fund (ETF), which owns numerous stocks. While that does not entirely protect against fraud by fund managers, investing with a group that manages several funds will likely reduce the likelihood of such an occurrence. Furthermore, amid that risk, one particular ETF could provide market-beating returns.
What is the stock?
In this case, I would invest my money in the VanEck Semiconductor ETF (SMH 0.21%).
NASDAQ: SMH
Key Data Points
The fund owns 26 of the top semiconductor stocks. While I would typically not advocate for investing in one industry, current conditions might amount to an exception.
Fortune Business Insights forecasts a compound annual growth rate (CAGR) of 15% for the chip industry through 2032. When looking at the artificial intelligence (AI) niche of the chip industry specifically, the CAGR rises to 29% through 2030, according to Grand View Research.
That technology is expected to transform business and change how people live and work, stoking demand for more advanced semiconductors. And chips are already a crucial component in much of current technology, so they're unlikely to disappear.
Consequently, the VanEck ETF had already built a history of delivering market-beating returns before AI was a focus. Over the last 10 years, it returned an average of 26% annually. Not only does this include down cycles within the chip industry, but it also beats the Nasdaq-driven Invesco QQQ Trust at 18% per year and the 14% annual return of the SPDR S&P 500 ETF Trust.
Moreover, management fees are reasonable. The ETF expense ratio is 0.35%, meaning investors pay $35 per year for every $10,000 invested in the fund. According to Morningstar, the average expense ratio was 0.36% in 2023, meaning shareholders likely will not incur excessive costs by owning this fund.
Holdings of the VanEck Semiconductor ETF
As mentioned before, the VanEck ETF holds 26 chip stocks, though allocations are not equal. About 19% of the fund consists of Nvidia stock, since it has benefited from its lead in the AI chip market.
The second-largest holding is Taiwan Semiconductor Manufacturing, which makes up 12% of the fund's assets. Since the company controls about 65% of chip fabrication as of the third quarter of 2024, it places investors at the center of semiconductor manufacturing.
Although no other stocks make up more than 10% of the fund, Broadcom comes close at 9%. It develops chips for specific business clients, making it one of the leading AI chip companies. It also applies AI to its enterprise software business, which now makes up nearly half of the company's revenue.
The remaining 60% of the fund is in 23 different chip stocks, including companies such as Advanced Micro Devices, Texas Instruments, ASML, and Micron Technology. These companies serve different parts of the semiconductor industry, diversifying the fund's shareholders within this sector.
Investing in the VanEck Semiconductor ETF
With the diversification within the chip industry and the effective management of the fund, my choice is the VanEck Semiconductor ETF.
Admittedly, investors should avoid limiting themselves to one stock, even if it is this ETF, and ideally, they should also consider having positions in other sectors.
However, the VanEck ETF still places investors in 26 stocks that will likely benefit from the rise of AI. And it has built a long-term track record of beating the S&P 500, even in down years for the chip industry. Between its long-term returns and its diversification, it is probably on track to continue serving its investors well.
