The VanEck Semiconductor ETF (SMH 1.63%) surged 18.2% in May according to data from S&P Global Market Intelligence. It's a remarkable move for an ETF, given that ETFs' usual role is to trade off outperformance for the security of being tied to sectorwide movement. However, in this case it was sectorwide movement that produced the exceptional results.
Why the semiconductor market flew higher in May
No prizes for guessing it comes down to accelerating momentum in artificial intelligence (AI) spending, with a host of companies either confirming that spending conditions remain robust or committing more capital to AI. However, a star prize is awarded for noting a subtle shift in which stocks are favored right now: broadly speaking, it's a shift from graphics processing units (GPUs) toward more traditional central processing units (CPUs).
All four companies below are among the 25 holdings in the Van Eck ETF. It's worth noting that the predominantly CPU companies, Intel and Qualcomm, notably outperformed the GPU leader, Nvidia. Meanwhile, Advanced Micro Devices offers both GPUs and CPUs.
Why CPUs joined the party
GPUs are essential for training AI Large Language Models (LLMs), as they excel at massive matrix calculations. As such, they are the backbone of AI infrastructure and also explain why Nvidia leads the industry. In comparison, CPUs are used for sequential logic, such as running an operating system and executing commands and processes.
As AI develops, an ever-increasing number of autonomous agents are performing tasks such as writing code, running calculations, and interacting with software, and they need more powerful CPUs to function effectively.
Image source: Getty Images.
The point was explicitly outlined by Intel CFO David Zinsner on the last earnings call, noting that in training solutions, the ratio of GPUs to CPUs was up to 8:1. However, in inference it's more "like the 3 to 4:1 kind of level. And as you get into agentic and multi-agent, it's one potentially even flip in the other direction a little bit."
Where next for the Van Eck Semiconductor ETF
The increasing demand for such CPUs, combined with supply constraints, is driving CPU stocks higher, and it's taking the Van Eck ETF with it. In a sense, the events help validate the ETF model of giving investors broad-based exposure to the sector, because an investor would have underperformed the ETF in May by merely holding, say, Nvidia. Something to think about.
