Artificial intelligence (AI) is increasingly becoming a fundamental driver across multiple industries, with generative AI emerging as a particularly dynamic area within this space. This technology differs markedly from traditional AI models by its ability to generate new content, rather than merely analyzing or filtering existing data.
Since the debut of ChatGPT in November 2022, which rapidly amassed over 30 million users in just two months, generative AI has demonstrated the potential to transform business operations and user interactions on a large scale. Despite ongoing exploration by companies on optimal generative AI applications, the commercial potential is substantial. Market research projections estimate the generative AI sector to be in an accelerated growth phase, expanding from approximately $71.4 billion in 2025 to $890.6 billion by 2032. This expansion corresponds to a compound annual growth rate (CAGR) of roughly 43.4%, underlining the opportunity for investors focused on this thematic growth.
Investing directly in individual generative AI companies can be challenging due to stock selection complexity and sector volatility. Exchange-traded funds (ETFs) offer an effective alternative by aggregating multiple companies engaged in the semiconductor industry, a critical underpinning of generative AI technologies. Semiconductors serve as the essential hardware enabling these advanced AI computational capabilities, making semiconductor ETFs a natural vehicle to access this growth trend.
VanEck Semiconductor ETF (SMH)
The VanEck Semiconductor ETF, tracking the MVIS US Listed Semiconductor 25 Index, holds 25 companies primarily focused on semiconductor manufacturing and equipment. The ETF’s portfolio is concentrated, with nearly half of its weighting attributed to five key players: Nvidia, Taiwan Semiconductor Manufacturing Company (TSMC), Broadcom, Micron Technology, and ASML. These companies represent essential segments of the semiconductor supply chain that fuel generative AI development.
- Nvidia and Broadcom are renowned chipmakers contributing advanced processors pivotal to AI workloads.
- Taiwan Semiconductor offers foundry services critical for fabricating semiconductor components for multiple industry leaders.
- ASML produces the lithography machines used in the intricate semiconductor manufacturing process.
- Micron Technology specializes in computer memory and data storage, supporting the vast data needs of AI applications.
This ETF provides targeted exposure to companies positioned at the vanguard of semiconductor innovation essential for generative AI. It charges a 0.35% expense ratio and has appreciated approximately 59% over the past year.
State Street SPDR S&P Semiconductor ETF (XSD)
For investors seeking broader and more balanced semiconductor exposure, the State Street SPDR S&P Semiconductor ETF offers access to 43 firms and uses an equal-weight methodology. This structure ensures more uniform allocation between large- and small-cap semiconductor companies, reducing reliance on a few dominant firms. The top holdings include Micron Technology, Macom Technology Solutions, Power Integrations, Intel, and Allegro Microsystems, each constituting roughly between 3.5% and 3% of the portfolio.
This fund is less vulnerable to sharp impacts from the performance of major semiconductor giants, such as AMD or Nvidia, due to its diversification approach. However, this also means investors may not benefit as strongly from outsized returns in those marquee companies. The ETF carries a 0.35% expense ratio and has gained about 41% in the last 12 months, placing it in a plausible position to meet or exceed the generative AI market’s projected growth rate.
iShares Semiconductor ETF (SOXX)
Managed by BlackRock, the iShares Semiconductor ETF focuses specifically on U.S.-based semiconductor firms involved in the design, manufacture, or distribution of semiconductors. Unlike the State Street ETF, SOXX is market-cap weighted and consists of 31 companies. The leading positions include Nvidia, Micron Technology, Advanced Micro Devices (AMD), Applied Materials, and Broadcom, which together account for over one-third of the fund's weighting.
This ETF provides investors with broad domestic semiconductor exposure while limiting foreign market influence. With an expense ratio of 0.34%, slightly lower than the previously mentioned ETFs, SOXX has demonstrated a 56% increase over the past year, indicating strong performance potential aligned with the anticipated growth of the generative AI sector.
Investment Considerations
Each of these ETFs offers a distinct mechanism to capitalize on generative AI’s rapid expansion by targeting the semiconductor industry, a foundational component of AI technologies. Investors should consider factors such as concentration risk in individual stocks, diversification across market capitalizations, and exposure to domestic versus global firms when selecting a fund.
Summary:
Generative AI is anticipated to experience significant growth, with market forecasts suggesting an annual increase exceeding 40% through 2032. Semiconductor companies play a pivotal role in enabling this technology, and ETFs focused on this sector offer investors diversified access to its advancement. The VanEck Semiconductor ETF provides concentrated exposure to industry leaders; the State Street SPDR S&P Semiconductor ETF offers broader, more balanced holdings; and the iShares Semiconductor ETF specializes in U.S.-focused companies. These funds have each demonstrated strong returns recently and expose investors to the core infrastructure underpinning generative AI innovations.