The artificial intelligence boom has fueled the S&P 500 and Nasdaq Composite to all-time highs. Multiple AI companies have exceeded $1 trillion market caps and have plenty of tailwinds that can support higher valuations.

While investors have many ways to play the AI boom, few choices compare with the VanEck Semiconductor ETF (NASDAQ:SMH), which has crushed the market over several years. Discover what makes the SMH ETF special and some alternatives to consider.

What’s Inside the VanEck Semiconductor ETF?

The VanEck Semiconductor ETF allocates its $24.5 billion in total assets across 26 semiconductor stocks. Semiconductor firms produce the AI chips that form the backbone of the AI boom.

These companies provide the necessary hardware and computing power for AI apps to function properly. Big tech giants like Microsoft (NASDAQ:MSFT) and Meta Platforms (NASDAQ:META) pour billions of dollars into these companies each year to access top-notch semiconductor chips.

Nvidia (NASDAQ:NVDA) is the largest holding and makes up almost 20% of SMH’s total assets. Taiwan Semiconductors (NYSE:TSM) is the next largest holding, which consists of 12.6% of the total portfolio. Broadcom (NASDAQ:AVGO) comes in third place, making up 9.6% of total assets.

Annualized Returns for the VanEck Semiconductor ETF

The VanEck Semiconductor comes with a 0.35% expense ratio and a 0.47% 30-day SEC yield. The yield is enough to cover the expense ratio, but dividends aren’t the reason why investors have been pouring their capital into this fund.

SMH shares are up by 46.9% over the past year. The AI boom has certainly played a role, but this fund is one of the top performers among any ETF. It has an annualized return of 29.3% over the past five years, a 26.4% annualized return over the past decade, and a sterling 22.4% return over the past 15 years. 

Semiconductors are used in many devices and everyday products. You’ll find them in computers, smartphones, cars, video game consoles, refrigerators, and other high-demand items. SMH invests in semiconductor stocks, so it’s been positioned to do well for many years. Artificial intelligence has put semiconductors more into the spotlight, but the industry has offered good investment opportunities for decades.

How SMH Stacks Up Against Other Tech ETFs

Investors can choose from several tech ETFs, including SMH. We’ll take a look at how SMH’s returns compare to two other tech ETFs that generate plenty of traction: VGT and XLK.

VGT has a 0.10% expense ratio and a 30-day SEC yield of 0.46%. The fund contains 316 stocks, with Apple, Nvidia, and Microsoft as the top three holdings. Those three stocks make up almost half of the fund’s total assets. VGT has had an annualized 20.9% return over the past five years. It also has the same annualized return over the past decade. While those returns are impressive, they’re not as good as SMH’s returns.

XLK falls into the same category. The tech ETF has delivered a 21.2% annualized return over the past five years and a 20.4% annualized return over the past decade. XLK’s top three holdings are also Apple, Nvidia, and Microsoft. These three assets make up more than 40% of the fund’s total assets. XLK has a 0.09% expense ratio.

Opportunities and Risks to Consider

SMH provides direct exposure to the AI boom thanks to its strong concentration in AI stocks. This amount of exposure can present tremendous upside if the AI boom continues. However, SMH does not provide much portfolio diversification.

If the semiconductor industry faces significant headwinds, you can’t fall back on other industries if you only buy SMH shares. Funds like VGT and XLK offer more protection since they don’t exclusively invest in semiconductor stocks.

Broader ETFs like FBCV may lag SMH during bullish markets, but those same broad ETFs don’t budge by much during sharp market corrections. If you invest in SMH, you still need other stocks and ETFs to have a diversified portfolio. Luckily, this ETF is in a high-growth sector, which can lead to outsized gains, but it’s risky to put all of your eggs into one industry. Furthermore, SMH comes with a lot of volatility, which may be too much for some investors to handle.

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