Investing in AI: A Closer Look at the iShares Semiconductor ETF
Artificial intelligence (AI) is shaping up to be one of the most impactful technologies of our time. Tools like OpenAI’s ChatGPT can answer complex queries and create various types of content almost instantaneously. As this technology evolves, creating it demands vast data centers powered by specialized chips from leading suppliers, particularly Nvidia.
Anticipated Spending on AI Infrastructure
Morgan Stanley forecasts a staggering $300 billion investment in AI data center infrastructure and chips by major companies such as Microsoft, Amazon, Alphabet, and Meta Platforms by 2025. While this spending is likely to significantly benefit Nvidia, other chipmakers and networking equipment suppliers stand to gain as well.
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Identifying winning investments can be challenging, but fortunately, investors don’t have to rely solely on personal judgment. The iShares Semiconductor ETF (NASDAQ: SOXX) aggregates almost every major hardware stock connected to the AI movement, making it an attractive option for those looking to benefit from this sector.
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iShares ETF: An Ideal Choice for AI Investments
This ETF stands out due to its specialized approach. Rather than holding hundreds of stocks, it exclusively invests in 30 companies focused on semiconductors. This concentrated strategy suggests that investors should consider this ETF as part of a well-rounded portfolio.
The iShares ETF offers significant exposure to the hardware segment underpinning the AI boom. Notably, its top five holdings make up 38.3% of the total portfolio value:
|
Stock |
iShares ETF Portfolio Weighting |
|---|---|
|
1. Broadcom |
11.42% |
|
2. Nvidia |
7.83% |
|
3. Advanced Micro Devices |
7.11% |
|
4. Qualcomm |
6.11% |
|
5. Texas Instruments |
5.82% |
Data source: iShares. Portfolio weightings are accurate as of Dec. 24, 2024, and are subject to change.
Broadcom supplies AI accelerators to hyperscale firms like Alphabet, offering a lower-cost alternative to Nvidia’s chips. These accelerators can be customized to fit specific company needs. Additionally, Broadcom produces networking equipment crucial for data centers.
Nvidia remains a leader in AI chip production. Their recently launched Blackwell graphics processing units (GPUs) promise up to 30 times the performance of their previous generation, ensuring continued strong demand into the coming year.
Meanwhile, Advanced Micro Devices is gearing up to enter the data center GPU market with its own competitor, the MI350, set to ship in late 2025. AMD is already a top provider of AI chips for personal computers, a sector expected to grow as more AI processing shifts to individual devices.
The iShares ETF also includes key players like Taiwan Semiconductor Manufacturing, responsible for producing many AI chips from Nvidia and AMD, and Micron Technology, known for its advanced memory and storage solutions for AI applications.
Potential Returns from the iShares ETF
Since its inception in 2001, the iShares ETF has recorded a compound annual return of 11.2%, outpacing the S&P 500‘s average annual return of 8.5%. Over the last ten years, this ETF saw an impressive annual return of 22.7%, spurred by technological advancements in cloud computing, software, and AI.
Despite this remarkable growth, it’s essential to consider that the chip market may currently be experiencing a golden age fueled by AI. Nvidia’s CEO predicts that data center investments will exceed $1 trillion as operators upgrade their capabilities for AI-related demands.
However, if the anticipated revolutions in AI technology fail to materialize, spending on chips might decrease, impacting the ETF’s performance negatively. Thus, diversifying your investments is crucial.
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*Stock Advisor returns as of December 23, 2024
John Mackey, former CEO of Whole Foods Market, is on The Motley Fool’s board. Other notable members include Randi Zuckerberg, a former Facebook executive, and Suzanne Frey, an executive at Alphabet. Anthony Di Pizio has no investments in the stocks mentioned. The Motley Fool recommends numerous companies, including those listed in the iShares Semiconductor ETF.
The views expressed here are those of the author and may not represent those of Nasdaq, Inc.
