ETFs
Nvidia and AMD Could Help This Stock Split ETF Turn $200,000 Into $1 Million
Semiconductors are at the heart of the artificial intelligence (AI) revolution. Developing the most advanced AI models would not be possible without data center graphics processing units (GPUs) built by companies such as Nvidia (NASDAQ: NVDA).
The company added $2.8 trillion to its market cap in the past 18 months alone thanks to strong demand for its GPUs. But the value created by AI is now reaching other chip companies, including Nvidia competitors like Advanced microsystems (NASDAQ: AMD).
Investors could take advantage of this trend by purchasing a representative sample of the entire chip industry and an exchange-traded fund (ETF) such as the iShares Semiconductor Exchange Traded Fund (ETF) (NASDAQ: SOXX) makes this really simple.
Image source: Getty Images.
The iShares Semiconductor ETF recently completed a stock split
iShares Semiconductor FNB generated a compound annual return of 25.3% over the past 10 years, crushing the previous year’s annual gain of 12.7%. S&P 500 index over the same period.
The ETF soared to $680 a share in March, making it somewhat expensive for small investors. To address this, iShares did a 3-for-1 stock split, tripling the number of shares outstanding and organically reducing the price per share by two-thirds. A share of the ETF now trades for about $254.
That’s good news because a broader investor base can now benefit from this ETF’s momentum thanks to the AI boom. Here’s how it could turn a $200,000 investment into $1 million over the long term. But don’t worry, investors with any starting balance can get a fivefold return if this scenario plays out.
All popular chip stocks neatly grouped into one ETF
The iShares ETF holds 30 different semiconductor stocks, but it is heavily weighted toward its top 5 holdings, which represent 37.8% of its total portfolio value:
|
1. Broadcom |
9.57% |
|
2. Nvidia |
8.60% |
|
3. Advanced Micro Devices (AMD) |
7.22% |
|
4. Applied materials |
6.59% |
|
5. Qualcomm |
5.82% |
Data source: iShares. Portfolio weights are accurate as of July 3, 2024 and are subject to change.
Broadcom (NASDAQ: AVGO) makes networking components for data centers, including switches that regulate the speed of data transmission from servers to devices. Its AI-related revenue jumped 280% in the second quarter of its 2024 fiscal year, and its top line increased 280% in the second quarter of its 2024 fiscal year. Expected to Generate Record $11 Billion Revenue from AI for the entire duration of the 2024 financial year (which ends on October 30).
Nvidia makes the world’s most powerful GPUs for developing AI models. Its data center revenue has grown by triple digits in each of the last four quarters, and the company still can’t keep up with demand. It’s gearing up to ship new GPUs based on its latest Blackwell architecture, such as the GB200, which can infer AI models five times faster than its industry-leading H100. That could save developers a lot of money, as they often pay by the minute for compute capacity.
The story continues
AMD is trying to compete with Nvidia in the data center market with its new MI300 GPU. However, the company already has a dominant 90% share of the AI-powered PC processor market, which could be a huge opportunity as AI migrates from data centers to the devices we use every day.
Outside of its top five, the iShares ETF holds a number of other stocks that are key to the AI sector. Semiconductor Manufacturing in Taiwan makes half of the world’s chips, including those made by Nvidia and AMD. Micron Technologyon the other hand, makes memory and storage chips that are critical to processing AI workloads. Its latest HBM3e memory solution powers some of Nvidia’s latest GPUs.
Turn $200,000 into $1 million
Since its inception in 2001, the iShares ETF has generated a compound annual return of 11.7%. However, it has generated a compound annual return of 25.3% over the past 10 years due to the explosive demand for chips in segments such as smartphones, cloud computing, enterprise software and now AI.
The table below shows how long it could take for the iShares ETF to turn a $200,000 investment into $1 million, under three scenarios:
-
Scenario 1:The ETF offers an annual yield of 11.7% over time, matching its long-term average.
-
Scenario 2:The ETF offers an annual return of 18.5% over time (midpoint of scenarios 1 and 3).
-
Scenario 3:The ETF offers an annual return of 25.3% over time, corresponding to its 10-year average.
|
$200,000 |
11.7% |
15 years old |
|
$200,000 |
18.5% |
10 years |
|
$200,000 |
25.3% |
8 years |
Author’s calculations.
In short, the ETF could generate a fivefold return over the next 15 years, even if it reverts to its long-term average annual return of 11.7%. But AI could be the biggest financial opportunity the chip industry has ever faced. Goldman SachsAI could add $7 trillion to the global economy over the next decade, and Cathie Wood’s Ark Investment Management estimates that number to reach $200 trillion by 2030!
That said, this ETF will almost certainly underperform if AI fails to live up to expectations, as stocks like Nvidia would lose much of the gains they’ve generated over the past year. It’s also possible that AI software could eventually become a bigger value creator than AI hardware, which could shift gains to stocks outside of the chip sector. That’s why the iShares ETF is best bought as part of a balanced portfolio.
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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Applied Materials, Goldman Sachs Group, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Nvidia and AMD Could Help This Stock Split ETF Turn $200,000 Into $1 Million was originally published by The Motley Fool