Investors cherish their long-term gains, yet the volatility of short-term investments often sends shivers down the spines of some. Paradoxically, this fear among those eyeing retirement closely presents a golden opportunity for those with a steadfast, long-term perspective.
The top-performing sector in the market over the last decade beckons with promises of lucrative returns. Despite its roller-coaster nature, this sector has proven to be a haven for long-term investors, outshining various segments in terms of sustained growth.
Embrace the Chips
The sector in focus is none other than the curious world of semiconductor stocks. A cursory glance at the performance of the iShares Semiconductor ETF (NASDAQ: SOXX), a cost-effective exchange-traded fund tracking the chip sector, reveals a striking narrative of market dominance. Chip stocks, as a collective force, have triumphed over the broader market, even overshadowing the tech and software domains over the past decade.
While the S&P 500 has enjoyed a 176% appreciation in the last ten years, providing a tidy sum for long-term investors, the tech arena has witnessed even more substantial growth. The Invesco QQQ Trust (NASDAQ: QQQ), tailored to mimic the Nasdaq 100, has surged by 408% during this period. Further accentuating this growth trajectory, the high-octane cloud software domain has propelled the iShares Expanded Tech-Software Sector ETF (NYSEMKT: IGV) by an impressive 413%.
However, all these pale in comparison to the semiconductor juggernaut, with a staggering 742% growth rate – almost double the tech sector and 4.2 times the market’s overall growth over the same timeframe.
Unraveling the Mystique of the Chip Sector
Despite the semiconductor sector’s notable long-term performance, it’s intriguing that many investors refrain from diving into this lucrative pool. Even Warren Buffett eschewed semiconductor stocks until his brief tryst with Taiwan Semiconductor Manufacturing (NYSE: TSM) in late 2022, eventually parting ways due to geopolitical concerns.
The skepticisms echoed by numerous Buffett followers and value investors center around the sector’s rapid pace of change, making long-term sustainability a murky concept, prone to competitive onslaughts. This skepticism holds some merit, given the swift ascension of Nvidia (NASDAQ: NVDA) and TSMC, now overshadowing Intel (NASDAQ: INTC), once the undisputed champion of the sector a mere decade ago. Intel now finds itself lagging far behind and grappling with an audacious comeback bid for survival.
Nevertheless, the beauty of investing in an ETF lies in its ability to ride the wave of industry growth by diversifying across both winners and losers, letting the cream rise to the top over time.
Young and investing? Don’t ignore the semis. Image source: Getty Images.
Decoding the Success of Semiconductors: Beyond AI
Examining the chart above reveals that the chip sector closely mirrored the software sector’s growth for the initial six years of the past decade, gradually outpacing the Nasdaq around late 2020, marking its ascent.
The technology space witnessed a substantial surge during the pandemic, with companies flocking to cloud computing to sustain operations and consumers leveraging stimulus checks to adopt new gadgets, fostering a robust in-home economy. This surging tide lifted both software, internet, and semiconductor boats.
However, towards late 2020 and into 2021, a noticeable divergence emerged – predating the spectacular debut of ChatGPT in late 2022. What catalyzed this divergence?
I posit that a renewed emphasis on stock valuations emerged as inflation and interest rates edged up from rock-bottom levels. During this phase, software valuations soared higher than chip counterparties, attributed to software being perceived as a more stable, recurring subscription business, while chip sales exhibited year-on-year fluctuations.
Conversely, semiconductor stocks traded at relatively subdued valuations, with many industry leaders doubling up as dividend distributors and conducting share buybacks alongside their technological growth trajectory. These shareholder-friendly practices enhance the sector’s long-term appeal.
While semiconductors may not soar as swiftly as cloud software, they hold their ground with a respectable long-term growth trajectory. Though subject to the occasional boom and bust cycle, the sector is anticipated to grow at an annualized rate of 11.6% over the foreseeable future.
The Semiconductor Sector: A Rising Tide in Changing Waters
Riding the Wave: Semiconductor Sector’s Growth
As we sail forth into the tumultuous waters of the 2020s, the semiconductor sector stands out like a mighty galleon, weathering the storm with resilience and fortitude. Spanning the period from 2023 to 2030, projections from DataHorizon Research paint a picture of steady growth and burgeoning potential for investors.
Unity in Strength: A Sector Beyond Nvidia
The rise of the semiconductor sector is not a one-man show starring Nvidia; rather, it is an ensemble cast with each member playing a vital role. While Nvidia may have taken the stage as a standout performer in graphics processing units (GPUs) for generative AI applications, it is joined by seven of the top 10 best-performing S&P 500 stocks over the past decade, with four of them reigning in the top five.
Technological Symphony: The Power of Semiconductor Giants
Creating cutting-edge chips with billions of microscopic transistors is no mean feat, and through past cycles, the chip sector has distilled into a select group of exceptional companies possessing unparalleled technological prowess. The convergence of multiple stocks specializing in AI chip design and manufacturing within this ecosystem is akin to a symphony of innovation, yielding collective rewards.
Future Horizons: A Call to Long-Term Investors
While the semiconductor sector may not replicate the meteoric gains of the past decade in the next 10 years due to elevated starting valuations, the trajectory of our world is unmistakably automated, intelligent, and interconnected — all fueled by semiconductors. This makes investing in an ETF like iShares Trust – iShares Semiconductor ETF a strategic move for investors with a horizon beyond a decade.
Considering the Voyage: Investing in iShares Trust – iShares Semiconductor ETF
Before setting sail with iShares Trust – iShares Semiconductor ETF, it’s prudent to weigh the options carefully. The Motley Fool Stock Advisor team, revered for their keen insights, has unveiled the 10 best stocks for investors to set their compass by, omitting iShares Trust – iShares Semiconductor ETF from the list. However, these chosen stocks hold the promise of bountiful returns in the years ahead.