Artificial intelligence (AI) could be one of the most valuable opportunities in history for investors, and the semiconductor industry is at the center of it. Nvidia (NASDAQ:NVDA) CEO Jensen Huang believes that $1 trillion worth of existing data center infrastructure needs to be upgraded with new chips to meet demand from AI developers.
Nvidia is currently the leader, but it won’t be the only beneficiary of this opportunity. However, instead of trying to figure out which stocks might be winners and losers in the long run, investors should consider buying an exchange-traded fund (ETF) instead.
The iShares Semiconductor ETF (NASDAQ:SOXX) is a specialized fund that invests exclusively in the world’s leading chip companies, and Nvidia is its largest holding.
The iShares Semiconductor ETF (SOXX) just completed a stock split
The SOXX ETF delivered a spectacular average annual return of 30.4% over the last five years. That’s almost three times the annual return S&P 500 index in the same period.
In fact, the SOXX ETF recently rose to $680 per share, making it somewhat inaccessible to smaller investors. As a result, iShares conducted a 3-for-1 stock split in March, tripling the number of SOXX shares outstanding and organically decreasing the share price by two-thirds. It had no impact on the ETF’s underlying value, but means investors can now buy in for just $217 (at the time of this writing).
Given the significant AI opportunity facing the chip sector, the SOXX ETF’s momentum is likely to continue long into the future. A $200,000 investment could become $1 million in 10 years – but don’t worry, investors with any amount of starting capital can benefit from a fivefold return if that opportunity arises.
All the leading chip stocks, conveniently packaged in one ETF
Nvidia develops some of the world’s most powerful graphics processing units (GPUs) for AI workloads. They are housed in central data centers operated by technology giants such as Microsoft And Amazonwho in turn sell the computing power to developers so that they can create, train and deploy their AI models.
Nvidia’s industry-leading H100 GPU increased the company’s data center revenue 217% year over year to $47.5 billion in fiscal 2024 (ending Jan. 28). This hardware is the main reason Nvidia is now a $2.2 trillion company – and considering the new, more advanced H200 GPU is now shipping, the momentum is likely to continue.
The SOXX ETF owns shares in 30 different chip companies, but is heavily weighted towards its five largest holdings, which account for 35.4% of its portfolio’s total value:
|
share |
SOXX ETF weighting |
|---|---|
|
1. Nvidia |
8.88% |
|
2. Broadcom (NASDAQ:AVGO) |
8.28% |
|
3. Qualcomm |
6.57% |
|
4. modern micro devices (NASDAQ:AMD) |
6.55% |
|
5. Micron technology (NASDAQ:MU) |
5.08% |
Data source: iShares. Portfolio weights are as of April 26, 2024 and are subject to change.
The ETF’s second-largest holding is Broadcom, a leading provider of data center networking and connectivity hardware. The Tomahawk 5 switch, for example, is designed to speed up data transfer from one point to another, which is critical in data centers with thousands of GPUs ingesting mountains of information every second. Broadcom also develops AI software on multiple fronts through its subsidiaries, including VMWare and Symantec.
Advanced Micro Devices is another key holding for the SOXX ETF. The company recently launched its MI300 data center chips to compete with Nvidia and they already have big customers like Microsoft, oracleAnd Metaplatforms. Additionally, AMD is a leader in the emerging market for AI-powered personal computing. Millions of notebooks and devices have already been sold with the company’s Ryzen AI chips.
Rounding out the top 5 is Micron Technology, a leading manufacturer of memory chips (DRAM) and memory chips (NAND). The HBM3E memory solution was chosen by Nvidia to power the new H200 GPU primarily because of its incredible efficiency. It uses 30% less power than competing solutions, which is important for data center operators as power is one of their largest costs.
Outside the top 5, the SOXX ETF owns popular chip stocks like Intel And Texas Instruments. It is also involved Taiwan semiconductor manufacturingwhich is responsible for producing more than half of the world’s chips, including those developed by Nvidia and AMD.
The SOXX ETF could generate $200,000 to $1 million in sales in a decade
The SOXX ETF has gained 53.5% over the past year, outpacing the S&P 500’s return of 22.3% and even outpacing the tech-heavy index’s return of 33.9% Nasdaq-100 Index.
And this outperformance is not an anomaly. The ETF delivered an average annual return of 30.4% over the last five years and 25.3% over the last ten years. Technologies like cloud computing and AI have only become mainstream in the last decade, which explains their incredible performance.
Aside from the $1 trillion opportunity for the data center industry predicted by Jensen Huang, every computer and device could also be equipped with AI capabilities in the long term, allowing for continued above-average returns in the SOXX ETF.
But even if the SOXX ETF delivered a more modest 15% annual return over the next 10 years, it would still result in significant financial gains for investors. The table below shows how different returns would affect an initial investment of $200,000:
|
Initial investment |
Compound annual return |
Balance sheet after 10 years |
|---|---|---|
|
$200,000 |
15% |
$809,111 |
|
$200,000 |
20% |
$1,238,347 |
|
$200,000 |
25% |
$1,862,645 |
|
$200,000 |
30% |
$2,757,169 |
Author’s calculations.
The SOXX ETF is a great way for investors to take advantage of the AI opportunity for the long term, especially after the recent stock split, which makes it far more accessible to investors of all experience levels.
Should you invest $1,000 in iShares Trust – iShares Semiconductor ETF now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Amazon, Meta Platforms, Microsoft, Nvidia, Oracle, Qualcomm, Taiwan Semiconductor Manufacturing, Texas Instruments, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and Intel and recommends the following options: long January 2025 $45 calls on Intel, long January 2026 $395 calls on Microsoft, short January 2026 $405 calls on Microsoft and short May 2024 calls above $47 on Intel. The Motley Fool has a disclosure policy.
Nvidia could help this stock split ETF turn $200,000 into $1 million in 10 years. The book was originally published by The Motley Fool