Key insights
- The VanEck Semiconductor ETF (SMH) has significantly outperformed broader market ETFs. Strong AI-driven demand is a tailwind, but high inflation, slowing GDP growth, and potential Fed rate hikes pose risks. The ETF is top-heavy, with Nvidia comprising a large portion. The semiconductor industry is projected to grow substantially, but valuation concerns exist. Overall, the article suggests a moderately bullish outlook tempered by macroeconomic uncertainties.
Unless you've been completely off the grid for the past few years, you probably know that semiconductor stocks have been some of Wall Street's hottest investments.
Over just the past three years, the VanEck Semiconductor ETF (SMH +1.49%) has returned an astonishing 327%. That far outpaces the 117% return of the Invesco QQQ ETF (QQQ +0.42%) and the 85% return of the Vanguard S&P 500 ETF (VOO +0.45%).
Now, semiconductors are facing competing forces. On one side, the tailwind of the artificial intelligence (AI) buildout is still very much in play. On the flip side, high inflation, slowing GDP growth and a Fed that may soon need to hike rates adds several complications to the outlook. Plus, the portfolio trades at 26 times next 12 month earnings estimates.
Should investors keep buying the chip demand story or start dialing back their expectations?
The demand for semiconductor chips isn't in question. Pretty much every major name in the sector is struggling to keep up with demand. The big question is whether shares are fairly priced based on growth conditions, or are they overdue for a breather.
The global semiconductor industry is forecast to reach $975 billion in sales in 2026, a 26% increase from 2025. Sales could hit the $2 trillion mark within the next decade.
Semiconductor manufacturers are going to need to spend substantial amounts of money on their own AI infrastructure, but the return on investment should be strong for the foreseeable future. Given that so many companies are still in the very early stages of their own buildouts, there's little question that chip demand will remain durable for years, if not decades.
There are a couple of things to consider before jumping into the VanEck Semiconductor ETF.
First, the fund is market-cap-weighted, which means you'll be buying a very top-heavy portfolio. Nvidia alone is nearly 18% of the portfolio. The top six holdings, which also include Taiwan Semiconductor Manufacturing, Broadcom, Intel, Advanced Micro Devices, and Micron Technology, account for 55%.
This is a big mega-cap play based on the fortunes of just a few companies.
Second, the fund's valuation may or may not be a concern. If earnings growth rates can continue at the rates they have been in this sector, I doubt many investors will worry about paying a 26 P/E multiple. But when we get to that point where growth rates start slowing, and we're past the peak acceleration period, it won't be surprising to see valuations potentially shrink quickly.
I don't see that happening for at least a year, so it's not a concern for anybody considering buying in June yet. As long as earnings hold up, which they definitely have this year, the VanEck Semiconductor ETF still looks like a buy in 2026.