Capital markets have gotten off to a strong start in 2024, with the S&P 500 up about 16.5% and the tech-heavy Nasdaq Composite Index up 20%.
One of the biggest themes fueling buying activity in the market right now is the hype surrounding artificial intelligence (AI). AI comes in many forms, but semiconductor stocks in particular are big beneficiaries of the AI revolution.
Perhaps the best-known chip stock is Nvidia, which has posted a 127% gain so far in 2024.
While Nvidia is an attractive buy, investors may want to consider alternatives.
Let’s dig deeper into why investors shouldn’t panic if they feel like they’ve missed the Nvidia wave, and explore why the VanEck Semiconductor ETF (NASDAQ: SMH) could be a better pick for the long term.
This ETF is great
One of the best ways to invest in the capital markets is through exchange-traded funds (ETFs). ETFs are unique investment vehicles made up of individual stocks, providing investors with a high degree of diversification.
The fund currently holds 26 positions in a variety of chip stocks. By holding the VanEck Semiconductor ETF, investors automatically gain exposure to high-quality opportunities in the AI chip space, including Nvidia, Taiwan Semiconductor, Broadcom, Advanced Micro Devices, Intel, and Micron Technology.
On the surface, the VanEck Semiconductor ETF offers investors a mechanism to hold a variety of chip stocks, but the more subtle trade-off is that investors also gain exposure to a variety of end markets across the chip industry.
In other words, while each of the chip stocks mentioned above are related in some way, many of them operate in different capacities, meaning the VanEck Semiconductor ETF will provide investors with further diversification and greater exposure to the broader AI industry than originally thought.
Image source: Getty Images.
Taking a passive approach has its advantages
Another reason why investing passively through ETFs is better than holding individual stocks is that portfolio management is inherently much easier.
If you hold individual stocks, it’s generally a good idea to attend earnings conference calls to hear management commentary on the business. Additionally, keeping a close eye on trends in a company’s growth, expense management, and profitability can help you decide whether to change your stock holdings.
The main problem here is that this type of analysis requires a significant amount of time and a keen understanding of financial analysis.
The story continues
When it comes to semiconductors specifically, there’s a pretty big risk that investors should be aware of: the semiconductor business tends to be cyclical.
Currently, growing interest in AI-enabled applications is driving demand for semiconductors.
But these demand trends will eventually temper. As a result, companies like Nvidia and its affiliates could see a slight slowdown in revenue and profits. That, in turn, would likely lead to selling off of Nvidia and other stocks.
Holding the VanEck Semiconductor ETF mitigates this risk. The fund invests broadly in the semiconductor business, but a professional asset manager is responsible for monitoring developments in the semiconductor business and updating the ETF’s allocation accordingly.
For these reasons, we believe the VanEck Semiconductor ETF will likely outperform most individual stocks in the AI and chip sectors over the long term.
Is the VanEck Semiconductor ETF worth buying now?
The chart below shows the total returns of the VanEck Semiconductor ETF over the past 10 years.
SMH Total Return Level Chart
Clearly, the VanEck Semiconductor ETF has significantly outperformed the S&P 500. However, it’s important to keep an eye on the slope of VanEck Semiconductor ETF’s returns beyond 2022. Considering that AI has become the tech sector’s latest hot topic over the past 18 months or so, it’s not at all surprising to see the VanEck Semiconductor ETF’s gains soar in a relatively short space of time.
Another important thing to note is that the VanEck Semiconductor ETF has a management fee of just 0.35%, making it much more reasonable than other tech-focused index funds. For example, the Invesco Semiconductors ETF has a management fee of 0.57%, while the First Trust Nasdaq Semiconductor ETF has a management fee of 0.60%.
Given the strong returns to date, high diversification, and reasonable management fees, I think the VanEck Semiconductor ETF is a great choice for investors looking for top-quality chip stocks and healthy exposure to the AI industry as a whole.
Should you invest $1,000 in the VanEck ETF Trust – VanEck Semiconductor ETF right now?
Before buying shares of VanEck ETF Trust – VanEck Semiconductor ETF, consider the following:
The analyst team at Motley Fool Stock Advisor has identified 10 stocks that investors should buy right now, and VanEck ETF Trust – VanEck Semiconductor ETF is not among them. The 10 selected stocks have the potential to generate big gains over the next few years.
Consider the date when Nvidia made this list: April 15, 2005… If you had invested $1,000 at the time of recommendation, you would have made $692,784!*
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Adam Spatacco invests in Nvidia. The Motley Fool invests in and recommends Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends buying January 2025 $45 calls on Intel and selling August 2024 $35 calls on Intel. The Motley Fool has a disclosure policy.
Missed out on Nvidia? You might want to buy this awesome ETF anyway This was originally published by The Motley Fool