Why Invest in Semiconductor ETFs Now?

See the top semiconductor ETFs and learn how AI can drive returns higher.

kent
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Research Lead
Reviewed by: etf.com Staff
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Edited by: Ron Day

Semiconductor ETFs were among the top-performing exchange-traded funds of 2023 and continue to be market leaders in 2024. The largest fund in the category, the VanEck Semiconductor ETF (SMH) gained 73% in 2023, while top holdings like NVIDIA Corp (NVDA) and Advanced Micro Devices, Inc. (AMD) rocketed up approximately 240% and 130%, respectively in the year. 

Semiconductors are the foundation of modern electronics, and they are essential for the development and deployment of artificial intelligence (AI) technology. Therefore, investing in semiconductor ETFs can offer several benefits to investors, as they provide exposure to the semiconductor industry without the need to buy individual stocks. 

In this article, we’ll demonstrate how semiconductors power modern technology, provide a list of top semiconductor ETFs, and cover the pros and cons of investing in these funds.  

What Is a Semiconductor ETF?

A semiconductor ETF is an exchange-traded fund that tracks a basket of stocks of companies involved in semiconductors' design, manufacturing or distribution. Semiconductors are the foundation of modern electronics, and the semiconductor industry is a major driver of economic growth.

There are many different semiconductor ETFs available, each with its unique focus. Some ETFs focus on the largest semiconductor companies, while others focus on smaller, more growth-oriented companies. Some ETFs track the entire semiconductor industry, while others focus on specific subsectors, such as memory chips or logic chips. Furthermore, ETFs offer multiple advantages over investing in individual stocks, including diversification, liquidity and low fees.

Semiconductors and AI 

More recently, semiconductors have benefited from artificial intelligence. AI algorithms require vast amounts of data to be processed and analyzed, and semiconductors provide the speed and power needed to do this. AI is also being used to improve the design of semiconductors, which can lead to faster, more efficient chips.  

Thus, AI can help to optimize the manufacturing process for semiconductors, which can lead to higher yields, lower costs and shorter production times.

Top Semiconductor ETFs By AUM

TickerFundAUMExpenses1-Yr Return
SMHVanEck Semiconductor ETF$12.9B0.35%63.74%
SOXXiShares Semiconductor ETF$11.3B0.35%54.76%
XSDSPDR S&P Semiconductor ETF$1.5B0.35%16.57%
FTXLFirst Trust Nasdaq Semiconductor ETF$1.3B0.60%43.37%
PSIInvesco Dynamic Semiconductors ETF$701.1M0.57%36.44%

Data as of January 24, 2024. Leveraged ETFs were not included in our search criteria for this list.

What Is the Most Traded Semiconductor ETF? 

The most traded semiconductor ETF is the VanEck Semiconductor ETF (SMH). It has an average daily trading volume of over 4 million shares, and it is one of the most popular ETFs on the market. SMH tracks the performance of the MVIS US Listed Semiconductor Index, which is a market-cap-weighted index of the largest semiconductor companies, such as NVIDIA Corporation (NVDA)

Does Vanguard Have a Semiconductor ETF?

Vanguard does not have a semiconductor ETF in its lineup, but there are Vanguard funds with semiconductor stocks included as holdings within a broader tech sector objective. For example, the Vanguard Information Technology ETF (VGT) includes large chip makers NVIDIA Corp and American Micro Devices, Inc. in its top 10 holdings. 

Semiconductor Industry Fuels ETF Growth 

Yes, semiconductor demand can impact ETF performance. This has been demonstrated through the high demand for driving AI technology. Semiconductor ETFs track the performance of a basket of stocks of companies involved in semiconductors' design, manufacturing, or distribution. The demand for semiconductors is a major driver of the performance of these ETFs. 

When the demand for semiconductors is high, the prices of semiconductor stocks tend to go up. This is because companies in the semiconductor industry can charge higher prices for their products when demand is high. As a result, semiconductor ETFs tend to perform well when the demand for semiconductors is high. 

Conversely, when the demand for semiconductors is low, the prices of semiconductor stocks tend to go down. This is because companies in the semiconductor industry are unable to charge higher prices for their products when demand is low. As a result, semiconductor ETFs tend to perform poorly when the demand for semiconductors is low. 

Other factors can also impact the performance of semiconductor ETFs, such as the overall performance of the stock market and the performance of other sectors of the economy. However, semiconductor demand is one of the most important factors that can impact the performance of these ETFs. 

Pros & Cons of Investing in Semiconductor ETFs 

Semiconductor ETFs can be a good investment for investors who are looking for exposure to a growing and important industry. However, investors should know the risks involved before investing in these growth-oriented funds. 

Here are some of the pros and cons of investing in semiconductor ETFs: 

Pros 

  • Potential for high returns: The semiconductor industry is a cyclical industry, which means that it goes through periods of boom and bust. However, the long-term trend for the semiconductor industry is growth, and this can lead to high returns for investors who invest in semiconductor ETFs. 
  • Diversification: Semiconductor ETFs provide exposure to a basket of stocks of companies involved in semiconductors' design, manufacturing or distribution. This can help to reduce risk, as investors are not simply investing in one company. 
  • Liquidity: Semiconductor ETFs are traded on major exchanges, which means that they are liquid and can be easily bought and sold. This makes them a good option for investors who want to be able to easily access their money. 
  • Low fees: Semiconductor ETFs typically have low fees compared to actively managed funds, which can help to boost returns. 

Cons 

  • Volatility: The semiconductor industry is cyclical, and this can lead to volatility in the prices of semiconductor stocks. This means that investors should be prepared for periods of significant price swings. 
  • Concentration risk: Some semiconductor ETFs are typically concentrated in a few large companies, which can increase risk. 
  • Sector risk: The semiconductor industry is exposed to some risks, such as changes in technology, demand and competition. 

Is Now a Good Time to Invest in Semiconductor ETFs? 

Semiconductor ETFs have significant long-term growth potential, especially with the onset of AI technology. However, investors should be prepared for volatile short-term price swings and should always use extra caution when considering an investment in high-growth ETFs. Therefore, with a long-term outlook and high tolerance for risk, an investor can enter a new position after understanding the potential for short-term volatility.

For many of the top semiconductor stocks like NVDA and AMD, earnings will need to continue to surprise on the high side in 2024 to keep the strong momentum going, as forward P/E ratios for many of the top semiconductor ETF holdings are above 30, whereas the S&P 500 averages 25 and small-cap stocks are at 15.

As with any investment decision, it's wise to conduct thorough research, assess your risk tolerance and consider your overall investment objectives before investing in semiconductor ETFs or any other investment vehicle. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 

 

Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 

 

Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.