Semiconductor stocks have been hot buys in recent years, and as a result of that, their valuations have become extremely pricey.
If you want to invest in artificial intelligence (AI) stocks, but aren’t sure what to buy, investing in exchange-traded funds (ETFs) can make the process easy. Finding an ETF that tracks leading chip stocks can be an effective way to invest in tech, without having to try and pick individual winners. It’s easier than having to track various stocks and keep tabs on how they are doing.
One semiconductor ETF that has been performing well in recent years is the iShares Semiconductor ETF (SOXX 1.10%). It’s up more than 130% over the past five years, which is a better return than the S&P 500, which has risen by just 82% during that timeframe.
But with semiconductor stocks rising so much in value in recent years and many of them trading at sky-high valuations, can this ETF still make for a good long-term buy today?
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The fund isn’t overly diversified but includes the key players
The iShares Semiconductor ETF focuses on investing in U.S.-based companies that are involved in designing, distributing, and manufacturing semiconductors. This allows investors to gain exposure to many types of stocks that can benefit from the boom in AI.
There are 30 holdings in the ETF, including Advanced Micro Devices (AMD), Nvidia, and Broadcom. At around 10%, AMD is the largest position in the fund. The fund isn’t heavily diversified, which may not be appealing to risk-averse investors, but if your goal is to track the leading companies in the semiconductor space, then this ETF can make for a great option to consider.
Investors should brace for volatility
When it comes to the tech sector, there are going to be boom-and-bust cycles. Right now, with the market being hot due to AI and many stocks trading at elevated valuations, there’s a big risk for a correction in the future, especially if AI-related spending cools off. The iShares Semiconductor ETF averages a price-to-earnings multiple of 36, which is far higher than the S&P 500 average of 25.
The ETF has also averaged a beta of nearly 1.6 over the past three years, which means that its movements are much more significant than that of the overall market. As a result, this isn’t an investment that will be suitable for investors who want stability and who aren’t comfortable with big swings in value.
Is this ETF a good investment to put in your portfolio?
If you’re a growth-oriented investor who wants exposure to many of the top semiconductor stocks involved in AI, then this is an ETF you’ll want to consider putting in your portfolio. Its expense ratio of 0.34% isn’t terribly high, and in return you get access to top tech stocks with tremendous growth potential in the years ahead.
The risk, however, is that in the short term there may be some volatility and perhaps even a potential correction in the cards should the hype and excitement around AI start to cool off, especially if tech companies start to scale back on their AI-related investments.
If you’re comfortable with that uncertainty and risk and are in it for the long term, then this can make for a solid ETF to buy and hold. As businesses incorporate AI into more of their products and services and leverage large language models, semiconductor stocks should experience strong growth in the future.
The upside can be significant over the years, but there likely will be bumps along the way, and it’s important that you brace for volatility. As long as you’re willing to hang on for multiple years, this ETF can be a no-brainer growth investment to put in your portfolio today.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Nvidia, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.