One of the hottest investment themes over the last year was artificial intelligence (AI). Each of the “Magnificent Seven” stocks is playing a major role in the AI movement and helped fuel the Nasdaq Composite to a more than 40% gain last year.
Perhaps the most scrutinized company among megacap tech is semiconductor manufacturer Nvidia. In 2023, the company witnessed a record demand for its graphics processing units (GPUs) and the stock soared nearly 240%.
However, investing in individual stocks is not for everyone. Some investors prefer to take a more passive approach, such as owning index funds. If you are interested in investing in the semiconductor industry, but prefer not to choose specific equities, the VanEck Semiconductor ETF (NASDAQ: SMH) may be a suitable option.
Investing just $300 per month in this exchange-traded fund (ETF) could help you build hundreds of thousands of dollars in savings in the long run — maybe even more. Let’s dig into why the VanEck Semiconductor ETF looks promising and how steady investments over a long-term time horizon can help you accumulate generational wealth.
Understanding the VanEck Semiconductor ETF
Index funds are a unique vehicle because they provide investors with exposure to a specific industry or investing theme, without owning a singular stock. Instead, index funds are constructed from a basket of different stocks — thereby presenting investors with a fair level of diversification.
The VanEck Semiconductor ETF holds 26 different semiconductor stocks. The top 10 positions constitute nearly 70% of the portfolio and include Nvidia, Advanced Micro Devices, Taiwan Semiconductor Manufacturing, Intel, Broadcom, and Qualcomm — a new favorite of Cathie Wood.
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Performance of the VanEck Semiconductor ETF
Given the hype around AI last year, the VanEck Semiconductor ETF’s 2023 return of 73% is a bit of an anomaly. Investors are better suited looking at the returns over longer time ranges to get a sense of how well this fund is constructed and how the semiconductor industry has performed in general.
The VanEck Semiconductor ETF has average annual returns of 17.9%, 33.2%, and 24.9% over the last three-, five-, and 10-year periods. These long-term returns handily outperform those of the S&P 500.
This dynamic may not be too surprising given technology stocks can often outperform the broader markets in any given year. However, what is more impressive is that the semiconductor industry has performed very well over the last decade — well before AI was fueling the sector’s growth.
Semiconductors are becoming increasingly used in applications such as automobiles, consumer electronics, and data centers. Research published by global management consulting firm McKinsey suggests the semiconductor industry could grow at an average annual rate of 8% and eclipse $1 trillion by 2030.
While it’s difficult to forecast growth prospects decades into the future, the proliferation of generative AI and the role semiconductors currently play could bode well for consistent market-beating returns in the long run.
Considerations for Investing in the VanEck Semiconductor ETF
While the VanEck Semiconductor ETF’s returns have provided outsize returns over the last decade, investors should be thinking about its longer-term prospects. Over the next several decades, economic cycles will experience different levels of inflation and borrowing-cost policies, impacting businesses and corporate budgets. Moreover, competition will likely rise over the long term, which could force fund managers to change weightings among the different positions in the index.
Given the overall stock market’s long-term annual return of 10%, and with semiconductor demand unlikely to slow down over the next couple of decades, a conservative assumption the fund’s average annual rate will be 12% over the next 30 years isn’t far-fetched. The table below illustrates how a monthly contribution of $300 to this ETF can compound into hundreds of thousands of dollars over the long term at an annual return rate of 12%.
| Number of Years | Total Savings |
|---|---|
| 10 |
Unlocking the Potential of VanEck Semiconductor ETF: A Closer Examination
The Power of Compound Interest
There’s an exquisite beauty to the way wealth can burgeon over time, especially when it comes to the compelling force of compound interest. A mere $300 monthly investment can mushroom into enormous financial heft given the right conditions. As legions of investors discover, the true mettle lies in steadfastly nurturing these investments year in, year out.
This approach mirrors the time-honored strategy of stalwarts like Warren Buffett who have harnessed the magic of compound interest to soar to financial summits.
Riding the Wave of Growth Industries
The current landscape of tech, particularly in semiconductor and AI sectors, is ablaze with unbridled fervor. The demand is palpable, with these industries enjoying a meteoric rise. Although market pundits prophesy a course correction in due course, the overarching trajectory is irrefutably infused with long-term secular tailwinds, potentially fueling sustained, market-beating returns.
If seizing greater control over your finances topped your New Year’s resolution list, initiating a monthly foray into this ETF could mark a splendid outset.
Analyst Insights and Prudent Considerations
Before leaping into the VanEck ETF Trust-VanEck Semiconductor ETF, it’s apt to heed the words of caution and counsel from the astute minds at Motley Fool Stock Advisor. The famed analyst team has meticulously sieved through the investment sphere, isolating what they consider to be the 10 premier stocks for prospective investors. Yet, conspicuously, VanEck Semiconductor ETF failed to grace this elite cadence.
The Stock Advisor service not only furnishes investors with an easily decipherable blueprint for triumph but also dispenses invaluable insights on curating a robust portfolio, bestowing regular updates from ace analysts, and tendering two fresh stock picks with each lunar cycle. Remarkably, this service has eclipsed the S&P 500 in returns by a staggering threefold since its inception in 2002*.
Casting a Glimpse into the Future
It’s indispensable to recognize that time-honored relics such as The Motley Fool and their devout followers aren’t the omniscient oracles of the financial realm. Investment decisions teeter on a pantheon of variables, not tied solely to a crystal ball of projected price swoops. It’s crucial to weigh a breadth of information, align your investment actions with your thriving financial ambitions, and heed the wisdom of battle-scarred investors.
With the purview of these factors, anchoring a portion of your financial destiny to VanEck Semiconductor ETF may indeed prove to be an instrumental stroke for augmenting your financial future.