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If I Could Only Add 1 ETF to My Portfolio This Year, Here's Exactly What I'd Buy
Key Points
The VanEck Semiconductor ETF has been one of the top ETFs over the last decade.
Top holdings include Nvidia, TSMC, and AMD.
The ETF is expensive at a P/E of 45, but it's delivering high growth.
When it comes to ETFs, the most popular ones tend to be index funds, tracking the S&P 500 and the Nasdaq-100. I think holding these is a smart move, and the Invesco QQQ Trust, which tracks the Nasdaq-100, has long been a top performer.
However, I think the AI boom still has room to run, and the ETF I'd most want to hold to get exposure to it is the VanEck Semiconductor ETF (NASDAQ: SMH).
Missed AI’s "Act 1"? Act 2 Could Be 15x Bigger. Most investors think they missed the AI boat because they didn't buy Nvidia in 2005. But according to our analysts, we’re only at the end of "Act 1"—the R&D phase. "Act 2" is the global rollout. Continue »
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What is the VanEck Semiconductor SMH?
The VanEck Semiconductor ETF tracks the top U.S.-listed chip stock, using the MVIS U.S. Listed Semiconductor 25 Index as a benchmark.
Its top five holdings include Nvidia, Taiwan Semiconductor Manufacturing, Advanced Micro Devices, Broadcom, and Intel.
Those stocks combined make up about 45% of the fund, with Nvidia accounting for 19% and TSMC contributing another 9%. The VanEck Semiconductor ETF is more concentrated in those top two stocks than the iShares Semiconductor ETF, an alternative chip ETF, which explains why the VanEck has outperformed its rival.
As you can see, both ETFs have delivered phenomenal results over the past decade, outperforming the market even before the AI boom accelerated their gains.
Why SMH is my top pick
The SMH ETF isn't cheap right now, trading at a price-to-earnings ratio of 41, but when you look at the growth rates of its top holdings, that valuation seems justified.
Nvidia is expected to grow revenue by 91% in its current quarter and by 65% in 2027. TSMC, the world's largest contract chip manufacturer, is targeting 47% growth this quarter and 35% next year, according to the analyst consensus.
Other top holdings, including memory chipmakers Micron and SK Hynix, are growing even faster, and some stocks, like Intel, are expected to see profits ramp up as it deploys its new 14A process and builds out its foundry business.
Though the market is at an all-time high, there are plenty of warnings out there about a potential pullback. While that's certainly a possibility, the AI boom still appears to have a lot of runway, especially after the warm reception that Meta's Muse AI personal assistant has received, which could drive another cycle of chip demand. In fact, CPU stocks like Intel and AMD rose in response to Muse's strong debut.
Given the growth of its top holdings, SMH still has a lot of upside potential. If you're looking for a high-growth ETF, this is an excellent choice.
Jeremy Bowman has positions in Advanced Micro Devices, Broadcom, Meta Platforms, Micron Technology, Nvidia, Taiwan Semiconductor Manufacturing, and VanEck ETF Trust-VanEck Semiconductor ETF. The Motley Fool has positions in and recommends Advanced Micro Devices, Broadcom, Intel, Meta Platforms, Micron Technology, Nvidia, Taiwan Semiconductor Manufacturing, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.