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Not Sure Which Chip or Artificial Intelligence (AI) Stock to Buy? Check Out This ETF Instead.
Choosing which individual stock to buy in a particular market sector can be difficult. With so many options out there, it's easy to get bogged down by the sheer amount of choices. Plus, if you make a mistake and pick the wrong stock while all the other options do well, it hurts confidence and returns.
Instead of picking one stock, investors can also choose to buy a thematic ETF (exchange-traded fund). ETFs can be a great choice, as they can be concentrated in a single industry, which gives investors more exposure than a broad market index fund. They don't have nearly the risk of individual stocks but won't have the same upside. Many investors can deal with giving up bigger returns in exchange for better odds of success, which is why ETFs have become so popular.
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One popular area where ETFs have succeeded is in the chip space. Most people don't understand what may set apart one chip company from another, especially when you get into the more specialized niche companies. However, with the trend toward more digital devices and artificial intelligence (AI) causing a chip boom, it's clear investors should have some exposure to the trend. The VanEck Semiconductor ETF (NASDAQ: SMH) is one of the top chip ETFs out there, and I think it should be at the top of investors' lists when investing in the chip industry.
This ETF is highly diversified within the chip industry
ETFs are required to disclose their holdings, which gives investors complete transparency into what they are investing in. This ETF currently has 26 positions, ranging from chip manufacturers like Taiwan Semiconductor (NYSE: TSM) to Texas Instruments (NASDAQ: TXN). This is obviously a key portion of the chip sector to hold, as these fabricators make chips that go into millions of devices.
Its top holding is Nvidia (NASDAQ: NVDA), which isn't a chip fabricator but produces computing hardware that directly applies chips. Similar to Nvidia is Advanced Micro Devices (NASDAQ: AMD), which also competes in the same industries. Having both of these companies also gives the VanEck Semiconductor ETF an AI spin, as both companies' products are heavily utilized to create AI models.
There are also companies that produce machines vital to chip manufacturing processes within the ETF. Applied Materials (NYSE: AMT) and ASML (NASDAQ: ASML) are both included, as these two produce machines that are critical in chip production. Without the equipment these two produce, chip manufacturing in today's capacity wouldn't be possible.
Another segment this ETF captures is the design side. Broadcom (NASDAQ: AVGO) is one of the largest companies in this sector and has helped tech giants design custom chips to meet specific design criteria. Synopsys (NASDAQ: SNPS) and Cadence Design Systems (NASDAQ: CDNS) are also included, and they produce software that is critical in designing chips.
The VanEck ETF's breadth is large, and investors can get a good pulse of the chip industry by investing in it. However, one thing to be aware of is that the ETF is quite concentrated in a few of the bigger players in the space. Just look at its top five holdings.
Company
Concentration
Nvidia
22.3%
Taiwan Semiconductor
13.7%
Broadcom
7.7%
AMD
4.8%
Texas Instruments
4.2%
Data source: VanEck. Makeup as of October 29, 2024.
Clearly, Nvidia and Taiwan Semiconductor will do the heavy lifting for this ETF, but that's probably how it should be since those two are industry stalwarts.
These holdings have worked out well for the ETF, as it has crushed the market.
The ETF has outperformed the S&P 500 this year
Compared to the S&P 500 (SNPINDEX: ^GSPC), the VanEck ETF is outperforming it this year by rising 44% compared to the broader market's 24%.
If you widen the time horizon to the start of 2023, the outperformance becomes even more impressive.
SMH Total Return Level Chart
Clearly, chips are having a market boom right now. If you want to invest in them but don't want the single stock risk, then the VanEck Semiconductor ETF is a great way to gain exposure. It has a solid mashup of chip stocks and should perform well as long as the chip industry is strong. Considering that there is huge AI demand, I'd say the chip industry should stay strong for some time.
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Keithen Drury has positions in ASML and Taiwan Semiconductor Manufacturing. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, American Tower, Cadence Design Systems, Nvidia, Synopsys, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $180 calls on American Tower and short January 2026 $185 calls on American Tower. The Motley Fool has a disclosure policy.
