Semiconductors are playing a pivotal role in the artificial intelligence (AI) revolution. These tiny chips are the brainpower behind AI models, enabling everything from natural language processing to complex data analysis. And at the forefront of this technological surge is Nvidia, which has become synonymous with cutting-edg. Ne GPU (graphics processing unit) technology.
Over the past 18 months, Nvidia has seen its market capitalization swell by a staggering $2.8 trillion, driven by the insatiable demand for its GPUs in AI applications.
Nevertheless, it is worth noting that Nvidia’s success story is not isolated, as the AI boom is creating ripples across the chip industry, benefiting competitors like Advanced Micro Devices (AMD), which although is not as prominent as Nvidia in the AI GPU market, it has carved out a significant niche for itself. AMD is making inroads into the data center market with its new MI300 GPU and holds a commanding 90% share in the processor market for AI-enabled personal computers.
Thus, as AI technology continues to evolve and integrate into various aspects of daily life, the demand for such processors is set to skyrocket, and this would likely present a lucrative opportunity for AMD and any other company within the semiconductor industry.
Now, how could you profit from this trend?
One way to do it could be through investing in a cross-section of the chip industry via exchange-traded funds (ETFs) like the iShares Semiconductor ETF.
The iShares Semiconductor ETF provides a broad exposure to the semiconductor industry as it is composed of 30 different semiconductor stocks, and it has been a standout performer, as it has delivered a compound annual return of 25.3% over the last decade – way above the S&P 500 index, which had an annual gain of 12.7% over the same period.
The iShares Semiconductor ETF’s portfolio is heavily weighted towards its top five holdings, which account for 37.8% of the total value. These top holdings include the two companies mentioned above, as well as Broadcom, Applied Materials and Qualcomm; and just as Nvidia and AMD, all these three companies have seen their AI-related revenues soar and are expected to continue rising.
Beyond the top five, the iShares ETF includes other significant players in the semiconductor industry, such as the Taiwan Semiconductor Manufacturing Company (TSMC), which manufactures half of the world’s chips, including those designed by Nvidia and AMD, and Micron Technology, which specializes in memory and storage chips essential for processing AI workloads. Micron’s latest HBM3e memory solution, for instance, powers some of Nvidia’s cutting-edge GPUs.
In regards to how it may perform in the future, let’s highlight that although the iShares ETF has delivered a compound annual return of 11.7% since its inception in 2001, over the last decade, driven by the explosive demand for chips in areas such as smartphones, cloud computing, enterprise software, and AI, it has achieved a much higher compound annual return of 25.3%. And based on these figures, we can consider the following scenarios:
If the ETF continues to deliver its long-term average annual return of 11.7%, an investment of $200,000 could grow to $1 million in about 15 years (this scenario assumes a steady but conservative growth rate, reflecting the ETF’s historical performance).
In a more optimistic scenario, where the ETF delivers an annual return of 18.5% – a midpoint between its long-term average and its recent 10-year performance – the investment could reach $1 million in approximately 10 years.
Finally, if the ETF matches its exceptional 10-year average annual return of 25.3%, the $200,000 investment could grow to $1 million in just 8 years.
Ultimately, regardless the scenario, there is potential for substantial returns in the future, particularly if the semiconductor industry continues to benefit from the AI boom.
According to Goldman Sachs, AI could add $7 trillion to the global economy over the next decade. Meanwhile, Cathie Wood’s Ark Investment Management projects that AI could contribute as much as $200 trillion by 2030. Thus, if these optimistic expectations become a reality and the semiconductor industry remains crucial for AI development, the potential for substantial returns is significant.
Also, if you are considering investing in the iShares ETF, now might be an opportune moment, as due to a recent 3-for-1 stock split, one share of the ETF is currently trading at around $254. Prior to the split, the ETF’s share price had climbed as high as $680. Therefore, right now may present a favorable entry point.
Nevertheless, before you dive in, you should keep in mind that due to the fact that the ETF’s performance is heavily tied to the success of AI and related technologies, if AI fails to live up to the hype, the semiconductor stocks within the ETF could see significant declines. Additionally, there is a possibility that AI software, rather than hardware, becomes the primary value creator in the AI ecosystem, and this shift could lead to gains being concentrated in stocks outside the chip space, which, in turn, could reduce the ETF’s performance.
As we have stated it in the past, always consider diversifying your portfolio. Sure, the iShares ETF is flashing the potential for great returns, but betting everything on it could leave you exposed. By spreading your investments, you cushion yourself against the bumps and ensure a smoother ride towards your financial goals. In simple terms, dive in smartly!
