Nvidia (NASDAQ: NVDA) has been the standout performer in the S&P 500 index for 2023, ranking as the top stock, and also achieved the third-best performance in 2024. The incredible performance of this stock is fueled by soaring demand for the company’s graphics processing unit (GPU) technology, which is integral to advancing artificial intelligence (AI).

The AI wave has been building momentum over recent years, with a significant turning point occurring in late 2022 when OpenAI launched its ChatGPT chatbot. This moment highlighted the potential of generative AI technology, expanding its applications significantly.

According to IDC, the global AI market is projected to exceed $630 billion by 2028, nearly tripling in size from 2024. This translates to a compound annual growth rate (CAGR) of almost 30%. Furthermore, AI is set for considerable growth in the long run.

While Nvidia stock remains a strong option for AI investment, some investors may prefer to explore artificial intelligence through an exchange-traded fund (ETF). These funds are traded similarly to stocks, but their diversification can mitigate the risks associated with individual stocks.

Remember, you don’t have to choose one over the other. Investing in a couple of AI stocks alongside an AI-focused ETF can be a wise strategy.

In my view, the top ETF for AI investment isn’t one that explicitly includes ‘artificial intelligence’ in its name; it’s actually the VanEck Semiconductor ETF (NASDAQ: SMH). Semiconductor chips form the foundation of AI infrastructure, powering everything from data center servers to electronic devices being enhanced by AI, such as smartphones and vehicles.

Data source: YCharts. Data as of Jan. 10, 2025. ETF = exchange-traded fund.

Overview of the VanEck Semiconductor ETF

The VanEck Semiconductor ETF, launched in 2011, is designed to mirror the performance of the MVIS US Listed Semiconductor 25 index. This index encompasses a selection of global companies that participate throughout the semiconductor value chain, with a preference for larger organizations. The fund includes 25 stocks, all of which are traded on major U.S. exchanges.

The ETF employs a modified market cap weighting system, limiting the maximum weight of any individual holding to 20%. The total expense ratio is 0.35%, which is reasonable for a sector-focused ETF.

Top 10 Holdings in the VanEck Semiconductor ETF

Data sources: VanEck Semiconductor ETF, finviz.com, and YCharts. EPS = earnings per share. *Portfolio weights and total net assets value as of Jan. 8, 2025. All other data as of Jan. 10, 2025.

The 10 leading stocks in this ETF include:

• Chip manufacturers: Seven out of the top ten are chip producers, including Nvidia (1st), Broadcom (3rd), Advanced Micro Devices (5th), Texas Instruments (7th), Qualcomm (8th), Micron (9th), and Analog Devices (10th).
• Foundry: Taiwan Semiconductor Manufacturing Company (2nd) produces chips for clients who outsource their manufacturing.
• Chip equipment makers: ASML (4th) and Applied Materials (6th).

Wall Street forecasts that Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), and AMD are set to experience significant five-year average annual earnings growth. Like Nvidia, AMD produces GPUs and holds the position as the second-largest provider of discrete GPUs. AMD is also a newcomer to the booming market of AI chips designed for data centers, where Nvidia leads.

TSMC stands to gain immensely from the strong demand for AI-capable chips; it manufactures components for many leading semiconductor firms, including Nvidia, as well as prominent tech companies like Apple, which have developed their own chips for AI applications and other uses.

In summary, the VanEck Semiconductor ETF is well-positioned to benefit from the expansion of artificial intelligence and boasts a longer performance history compared to many recently launched AI ETFs.

Beth McKenna has stakes in Nvidia. The Motley Fool owns positions in and recommends ASML, Advanced Micro Devices, Apple, Applied Materials, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool endorses Broadcom. The Motley Fool has a disclosure policy.

The Motley Fool is a content partner with YSL News, providing financial news, analysis, and insights aimed at helping people manage their financial destinies. Its content is created independently of YSL News.

Is it a good idea to invest $1,000 in the VanEck ETF Trust – VanEck Semiconductor ETF now?

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