Why Invest in Semiconductor ETFs Now?

Why Invest in Semiconductor ETFs Now?

See the top semiconductor ETFs and learn how AI can drive returns higher.

Research Lead
Reviewed by: etf.com Staff
Edited by: Ron Day

Semiconductor ETFs were among the top-performing exchange-traded funds of 2023 and continue to be market leaders in 2024, as the largest fund in the category, the VanEck Semiconductor ETF (SMH), is up 40% this year. 

Is the artificial intelligence (AI)-driven performance overhyped and due for a correction, or can it continue its dominance? 

In this article, we’ll demonstrate how semiconductors power modern technology, provide a list of top semiconductor ETFs, and cover the pros and cons of investing in these funds.  

What Is a Semiconductor ETF?

A semiconductor ETF is an exchange-traded fund that tracks a basket of stocks of companies involved in semiconductors' design, manufacturing or distribution. Semiconductors are the foundation of modern electronics, and the semiconductor industry is a major driver of economic growth.

There are many different semiconductor ETFs available, each with its unique focus. Some ETFs focus on the largest semiconductor companies, while others focus on smaller, more growth-oriented companies. Some ETFs track the entire semiconductor industry, while others focus on specific subsectors, such as memory chips or logic chips. 

Furthermore, ETFs offer multiple advantages over investing in individual stocks, including diversification, liquidity and low fees.

What Is a Semiconductor?

A semiconductor is a material with electrical conductivity that falls between a conductor, like copper, and an insulator, like glass.  In simpler terms, it conducts electricity better than an insulator but not as well as a conductor.  This unique property makes them incredibly versatile and essential for modern electronics.

Here's a deeper look at semiconductors:

  • Made from pure elements or compounds: Silicon is the most common semiconductor material, but others like germanium or gallium arsenide are also used.
  • Doping for control: The magic lies in how semiconductors can be manipulated. Adding tiny amounts of impurities (doping) significantly changes their conductivity, allowing them to function as switches, amplifiers, and more.
  • Building blocks of electronics: Transistors, the fundamental building blocks of modern electronics, are made from semiconductors. These transistors are the tiny on/off switches that make up integrated circuits (ICs) or microchips, the brains of countless devices.

In summary, semiconductors are like the workhorses of the tech world, enabling everything from smartphones to complex medical equipment.  Their unique electrical properties and ability to be controlled make them irreplaceable in the modern world.

Semiconductors and AI 

More recently, semiconductors have benefited from artificial intelligence. AI algorithms require vast amounts of data to be processed and analyzed, and semiconductors provide the speed and power needed to do this. AI is also being used to improve the design of semiconductors, which can lead to faster, more efficient chips.  

Thus, AI can help to optimize the manufacturing process for semiconductors, which can lead to higher yields, lower costs and shorter production times.

Top Semiconductor ETFs by AUM

TickerFundAUMExpenses1-Yr Return
SMHVanEck Semiconductor ETF$21.0B0.35%89.99%
SOXXiShares Semiconductor ETF$14.3B0.35%67.41%
XSDSPDR S&P Semiconductor ETF$1.5B0.35%31.27%
FTXLFirst Trust Nasdaq Semiconductor ETF$1.5B0.60%57.25%
PSIInvesco Dynamic Semiconductors ETF$848.5M0.57%55.20%

Data as of May 24, 2024. Leveraged ETFs were not included in our search criteria for this list.

What Is the Most Traded Semiconductor ETF? 

The most traded semiconductor ETF is the VanEck Semiconductor ETF (SMH). It has an average daily trading volume of over 4.6 million shares, and it is one of the most popular ETFs on the market. SMH tracks the performance of the MVIS US Listed Semiconductor Index, which is a market-cap-weighted index of the largest semiconductor companies, such as NVIDIA Corporation (NVDA)

Does Vanguard Have a Semiconductor ETF?

Vanguard does not have a semiconductor ETF in its lineup, but there are Vanguard funds with semiconductor stocks included as holdings within a broader tech sector objective. For example, the Vanguard Information Technology ETF (VGT) includes three large chip makers in its top ten holdings, led Nvidia, which represents 12% of the fund's assets.

Pros & Cons of Investing in Semiconductor ETFs 

Semiconductor ETFs can be a good investment for investors who are looking for exposure to a growing and important industry. However, investors should know the risks involved before investing in these growth-oriented funds.

Here are some of the pros and cons of investing in semiconductor ETFs: 


  • Potential for high returns: The semiconductor industry is a cyclical industry, which means that it goes through periods of boom and bust. However, the long-term trend for the semiconductor industry is growth, and this can lead to high returns for investors who invest in semiconductor ETFs. 
  • Diversification: Semiconductor ETFs provide exposure to a basket of stocks of companies involved in semiconductors' design, manufacturing or distribution. This can help to reduce risk, as investors are not simply investing in one company. 
  • Liquidity: Semiconductor ETFs are traded on major exchanges, which means that they are liquid and can be easily bought and sold. This makes them a good option for investors who want to be able to easily access their money. 
  • Low fees: Semiconductor ETFs typically have low fees compared to actively managed funds, which can help to boost returns. 


  • Volatility: The semiconductor industry is cyclical, and this can lead to volatility in the prices of semiconductor stocks. This means that investors should be prepared for periods of significant price swings. 
  • Concentration risk: Some semiconductor ETFs are typically concentrated in a few large companies, which can increase risk. 
  • Sector risk: The semiconductor industry is exposed to some risks, such as changes in technology, demand and competition. 

Semiconductor Industry Outlook

For many of the top semiconductor stocks like NVDA, earnings will need to continue to surprise on the high side in 2024 to keep the strong momentum going, as forward P/E ratios for many of the top semiconductor ETF holdings are above 30, whereas the S&P 500 averages 25 and small-cap stocks are at 15.

Semiconductor ETFs have significant long-term growth potential, especially with the onset of AI technology. However, investors should be prepared for volatile short-term price swings and should always use extra caution when considering an investment in high-growth ETFs. Therefore, with a long-term outlook and high tolerance for risk, an investor can enter a new position after understanding the potential for short-term volatility.

As with any investment decision, it's wise to conduct thorough research, assess your risk tolerance and consider your overall investment objectives before investing in semiconductor ETFs or any other investment vehicle. 

Kent Thune is Research Lead for etf.com, focusing on educational content, thought leadership, content management and search engine optimization. Before joining etf.com, he wrote for numerous investment websites, including Seeking Alpha and Kiplinger. 


Kent holds a Master of Business Administration (MBA) degree and is a practicing Certified Financial Planner (CFP®) with 25 years of experience managing investments, guiding clients through some of the worst economic and market environments in U.S. history. He has also served as an adjunct professor, teaching classes for The College of Charleston and Trident Technical College on the topics of retirement planning, business finance, and entrepreneurship. 


Kent founded a registered investment advisory firm in 2006 and is based in Hilton Head Island, SC, where he lives with his wife and two sons. Outside of work, Kent enjoys spending time with his family, playing guitar, and working on his philosophy book, which he plans to publish in the coming year.