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Do you like Nvidia Stock but prefer ETFs? This is the best semiconductor ETF for investing in artificial intelligence (AI) and other megatrends.

According to the Semiconductor Industry Association, the global semiconductor (or chip) market is expected to grow by more than 13% to nearly $600 billion by 2024. Moreover, this market should reach $1 trillion in sales by 2030, according to top consulting firm McKinsey & Company. These rosy growth projections are driven by several massive global trends that are still in their infancy, according to McKinsey, including artificial intelligence (AI), vehicle electrification and autonomous driving.

To buy Nvidia (NASDAQ: NVDA) Stocks are a way to gain exposure to these trends. The company’s graphics processing unit (GPU) chips have a dominant share of the data center AI market, whose growth has accelerated dramatically thanks to generative AI. (This is the technology behind OpenAI’s incredibly popular chatbot, ChatGPT.) And while Nvidia’s automotive business is still relatively small, it has the potential for massive growth once self-driving vehicles become legal in the United States and beyond.

Some investors are understandably hesitant to buy Nvidia stock after its meteoric run-up. The stock is up 233% and 480% respectively in the past year and the three years since April 12. A great way to get significant exposure to this top-performing stock, but with less risk than buying it, is to invest in a stock market. -traded fund (ETF) that is heavily weighted with Nvidia shares: VanEck Semiconductor ETF (NASDAQ: SMH).

VanEck Semiconductor ETF: The best performing semiconductor ETF

Of the semiconductor ETFs with a trading history of at least three years, the VanEck Semiconductor ETF has the best returns in the short, medium and longer term.

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The VanEck Semiconductor ETF began trading in December 2011, so it has a solid track record, at least compared to other semiconductor ETFs. It easily outperforms the S&P500 index (widely considered the best indicator of the overall US stock market) over the short, medium and longer term, as shown below.

ETF/Index

Return of the year so far 2024

1 year return

3 year return

5 year return

10 year return

VanEck Semiconductor ETF

26.2%

77.4%

78.4%

305%

1,030%

S&P500

7.9%

27.2%

30.1%

91.6%

240%

Data source: YCharts. Data as of April 12, 2024.

VanEck Semiconductor ETF: the basics

The VanEck Semiconductor ETF is an index fund designed to track the performance of the MVIS US Listed Semiconductor 25 Index. This index consists of a portfolio of global companies involved in the semiconductor value chain – from the design and production of chips to the production of equipment used to make chips. As the name of this index suggests, it has 25 stock holdings and all stocks are listed on a major US stock exchange.

It is positive that the index on which this ETF is based favors large companies in my view. Large companies in the semiconductor sector benefit from economies of scale, which typically include greater bargaining power with suppliers and subcontractors than their smaller peers.

This ETF has a reasonable total expense ratio of 0.35%.

VanEck Semiconductor ETF: Top 10 Stock Holdings

Company no.

Company

Market capitalization

Wall Street’s expected annual earnings per share over the next five years

Weight (% of portfolio)*

5 year return

1

Nvidia

$2.2 trillion

37.9%

20.39%

1,770%

2

Taiwanese semiconductor manufacturing (NYSE: TSM)

$739 billion

4.3%

12.70%

282%

3

Broadcom

$623 billion

14.4%

7.93%

398%

4

ASML Holding

$378 billion

21.7%

4.93%

401%

5

Micron technology

$136 billion

(2.6%)

4.72%

197%

6

Qualcomm

$191 billion

8.3%

4.68%

240%

7

Applied materials

$173 billion

14.3%

4.51%

410%

8

Lam Research

$125 billion

9.4%

4.50%

428%

9

Texas Instruments

$151 billion

10%

4.47%

63.7%

10

Advanced micro devices (NASDAQ: AMD)

$264 billion

25%

4.04%

486%

Total Top 10

N/A

N/A

N/A

72.87%

N/A

Total ETF

N/A

Total net worth of $18.8 billion

N/A

100%

305%

N/A

S&P500

N/A

N/A

N/A

91.6%

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Data sources: VanEck Semiconductor ETF, Yahoo! Finance and YCharts. EPS = earnings per share. *Portfolio weight as of April 11, 2024. All other data as of April 12, 2024.

The top 10 positions above fall into these broad categories:

  • Chip manufacturers: Nvidia (No. 1), Broadcom (3), Micron (5), Qualcomm (6), Texas Instruments (9) and Advanced Micro Devices (10).

  • Foundries: Taiwanese semiconductor manufacturing (2). TSM produces chips for companies that fully or partially outsource their chip production. Nvidia is one such company. It is a so-called “fabless chipmaker” because it does not do its chip production in-house. Wall Street analysts estimate that Nvidia would be TSM’s second-largest customer in 2023. So TSM benefits significantly from Nvidia’s incredible growth.

  • Semiconductor equipment manufacturers: ASML (4), Applied Materials (7) and Lam Research (8).

What data stands out to you in the table above, other than the stock performance data? Maybe one or both items:

  • Largest holding company: Nvidia is not only the ETF’s largest holding, but it is by far weighed most heavily. This is a positive if you want significant exposure to this top-performing stock but are hesitant to buy it for whatever reason. This could mean that you are concerned that the price is rising too quickly and is overvalued, or that you simply prefer to invest in baskets of shares within a sector rather than in individual shares.

  • Best expected earnings growth: Nvidia and Advanced Micro Devices (AMD) will post the best average annual earnings growth over the next five years, according to Wall Street analysts. These two companies are the #1 (by far) and #2 respectively as manufacturers of discrete GPUs. GPUs are the chips of choice for training artificial intelligence models and running AI applications in data centers. Given the rapid adoption of AI by companies and other entities, it makes sense that Nvidia and AMD have the highest consensus earnings expectations.

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A great ETF to invest in AI and other massive global growth trends

The semiconductor industry is poised for decades of strong growth, thanks to several massive global growth trends that are still in their early stages, including AI, the electrification of the global vehicle fleet, and autonomous driving.

The VanEck Semiconductor ETF is an attractive way for investors to invest in these trends. Its diversification makes it a less risky way to gain exposure to the chip space, compared to buying individual stocks.

Should You Invest $1,000 in Nvidia Now?

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Beth McKenna has positions at Nvidia. The Motley Fool holds positions in and recommends ASML, Advanced Micro Devices, Applied Materials, Lam Research, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Do you like Nvidia Stock but prefer ETFs? This is the best semiconductor ETF for investing in artificial intelligence (AI) and other megatrends. was originally published by The Motley Fool

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