Wall Street’s Increasing Focus on Semiconductor ETFs Amid AI Boom
The semiconductor sector has emerged as one of the most closely watched segments of the market, driven largely by the AI boom and the unprecedented rise of Nvidia. As the largest U.S. stock by market capitalization, Nvidia’s ascent past $4 trillion has sparked concerns about concentration risk within the S&P 500. Yet, for investors with an appetite for growth, concentrated exposure to chip stocks via ETFs presents compelling opportunities.
Wall Street is innovating to offer investors more targeted and concentrated bets within the semiconductor space, reflecting the sector’s critical role in powering AI and technology advancements.
VanEck Semiconductor ETF: The Benchmark for Chip Sector Growth
The VanEck Semiconductor ETF (SMH) remains the flagship fund for capturing the semiconductor ecosystem’s growth. Covering a broad supply chain—from Nvidia’s GPU designs to TSMC’s manufacturing and ASML’s equipment—the ETF has amassed nearly $30 billion in assets under management and delivered close to 30% gains year-to-date, significantly outperforming broad market ETFs such as the Vanguard S&P 500 ETF and SPDR S&P 500 ETF Trust (SPY), both up around 13%.
Nicholas Frasse, product manager at VanEck, highlighted on CNBC’s “ETF Edge” that SMH’s success stems from its portfolio of leading companies benefiting from surging AI demand. Nvidia, once primarily a gaming chip maker, has become the industry’s AI flagship.
On Nvidia’s latest earnings call, CEO Jensen Huang described the Blackwell platform as “the next generation AI the world’s been waiting for,” noting demand as “extraordinary.” The company’s expanding influence includes a $5 billion investment partnership with Intel to co-develop data center and PC chips.Diverse ETF Strategies: Equal-Weighting and Momentum-Based Approaches
Beyond VanEck, other ETFs offer differentiated exposure to the chip sector. The iShares Semiconductor ETF (SOXX) and Invesco PHLX Semiconductor ETF (SOXQ) provide alternative portfolios with varying weightings and holdings.
The SPDR S&P Semiconductor ETF (XSD) stands out with its equal-weighted approach, giving smaller companies such as Astera Labs and Credo Technology comparable representation to industry giants like Nvidia and Broadcom. Nvidia’s weighting in XSD is under 3%, compared to over 20% in SMH and roughly 8-12% in other major ETFs. This strategy reduces single-stock concentration risk while still capitalizing on sector growth.
- Astera Labs
- Credo Technology
- Impinj
- Rigetti Computing
- Rambus
Despite its smaller size ($1.51 billion AUM), XSD has outperformed many peers with approximately 26% gains year-to-date.
The Invesco Semiconductors ETF (PSI) employs a custom index selecting semiconductor stocks based on multiple factors including price momentum, earnings momentum, and value metrics. This approach introduces mid-cap companies often excluded from larger ETFs, providing a nuanced exposure for investors seeking growth beyond mega-cap dominance.
- Micron Technology
- Lam Research
- Broadcom
- KLA Corporation
- Qualcomm
Strategas Securities’ Todd Sohn advises that investors bullish on technology growth should consider diversifying across multiple semiconductor ETFs to capture different facets of the sector.
Fabless Semiconductor ETFs: A Focused Play on Chip Design
An emerging niche within the sector is the fabless semiconductor ETF, which targets companies that design and sell chips but outsource manufacturing. VanEck’s recently launched Fabless Semiconductor ETF (SMHX) exemplifies this theme, with Nvidia as its largest holding at over 18%.
This ETF also features pure-play fabless companies like Cadence Design Systems and innovators focused on power efficiency, such as Monolithic Power, which develops chips to reduce energy consumption in data centers—an increasingly critical factor amid the AI-driven chip demand surge.
VanEck’s Nicholas Frasse describes the current environment as a “super cycle,” emphasizing that the semiconductor industry is in the early stages of a transformative growth phase.FinOracleAI — Market View
The semiconductor sector’s performance, led by Nvidia’s AI-driven growth, continues to attract concentrated investor interest. ETF strategies are evolving to balance concentration risk with diversification, offering multiple avenues to participate in the chip boom.
- Opportunities: Exposure to high-growth AI chipmakers and diversified semiconductor supply chain players; access to emerging fabless companies; potential for outsized returns during the AI super cycle.
- Risks: High concentration risk in mega-cap stocks; sector volatility tied to technology cycles; geopolitical and supply chain uncertainties impacting manufacturing.
Impact: The growing sophistication and variety of semiconductor ETFs offer investors tailored options to capitalize on AI-driven growth while managing concentration risk, signaling a positive outlook for tech-focused portfolios.
