This Unstoppable ETF Is Down 12% From Its High -- and History Says Now Is a Smart Time to Invest

You would have a hard time finding an exchange traded fund (ETF) that has performed better than the VanEck Semiconductor ETF (NASDAQ: SMH) over the years.

Pick a time frame, and the VanEck Semiconductor ETF has outperformed just about any other ETF -- and not just recently but over the long term. The ETF is up 65% year to date and 88% over the past year. No major tech, large-cap, or small-cap ETF comes close to that. And over the past three years, it has generated a staggering 60% average annualized return.

The outperformance has, of course, been driven by chip stocks, which have been leading the AI revolution and current bull market.

It tracks the MVIS US Listed Semiconductor 25 index, which includes the 25 largest, most liquid semiconductor stocks in the world. So when graphics processing unit (GPU) makers like Nvidia and Broadcom were dominating earlier in this bull market, they drove the performance of this ETF, and now it's memory chip stocks like Micron Technology that are fueling the eye-popping results.

But since reaching a 52-week high of $671 per share on June 22, the ETF has dropped about 12% to $593 per share as of Sept. 21. And just a week ago, it had been at $541 per share, down 19% from its recent high. Investors have been piling back in over the past week, buying on the dip. But it is still an excellent opportunity at its current price.

The best performer out there

As noted, the VanEck Semiconductor ETF has not just been a peak performer over the past year or three years. Its outperformance goes back to its launch 15 years ago in 2011. Over the past 10 years, it has averaged a 33% annualized return, beating the major tech, growth, and large-cap ETFs.

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And over the past 15 years, since its inception in December of 2011, it has posted an annualized return of about 29%, also beating its rivals.

The recent 12% to 19% dip is part of the territory with this ETF, which is prone to short-term volatility. Because all two dozen or so of the holdings are chip stocks -- like Nvidia, Taiwan Semiconductor Manufacturing, and Broadcom, its top three holdings -- they will move mostly in tandem when there is a negative catalyst.

But over the long term, those short-term dips have proven to be buying opportunities, given the importance of chip stocks in the digital and AI eras and the accompanying historical returns the ETF has generated.

So when you see the VanEck Semiconductor ETF go through one of its periods of volatility, it should be on your radar to add shares when it temporarily corrects.

However, because it is highly concentrated in one industry within one sector, investors should be careful not to allocate too much of their portfolio to this ETF. Keep it insulated within a diversified portfolio with a relatively small allocation that's balanced out by other assets that tap into different sections of the stock market universe and perform differently in any given market cycle.

Dave Kovaleski has positions in Micron Technology. The Motley Fool has positions in and recommends Broadcom, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.