Nvidia and AMD Could Help This Stock Split ETF Turn $200,000 Into $1 Million

This ETF is crushing the performance of the S&P 500 index thanks to its holdings in the world’s largest semiconductor stocks.

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 (NVDA -1.91%).

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 (AMD 4.88%).

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) (SOXX Act 0.20%) 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 per share in March, making it somewhat expensive for small investors. To solve that problem, iShares executed a 3-for-1 trade stock splitwhich tripled the number of shares outstanding and organically reduced the price per share by two-thirds. A share of the ETF now trades at around $254.

This is positive news as a broader investor base can now benefit from the momentum of this ETF thanks to The rise of AIHere’s how a $200,000 investment could turn into $1 million over the long term — but don’t worry, investors with any starting balance can get five times the 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:

Action

iShares ETF Portfolio Weighting

Data source: iShares. Portfolio weights are accurate as of July 3, 2024 and are subject to change.

Broadcom (AVGO -1.50%) makes networking components for the data center, including switches that regulate the speed at which data is transmitted from servers to devices. Its AI-related revenue soared 280% in the second quarter of its 2024 fiscal year, and that’s 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 more powerful GPUs to develop AI models. Its data center revenue has grown by triple digits in each of the past four quarters, and the company still can’t keep up with demand. It’s preparing to ship new GPUs based on its latest Blackwell architecture, such as the GB200 that can AI inference models five times faster than its predecessor, the H100. It could save developers tons of money, as they often pay for their computing capacity by the minute.

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% market share. AI-Powered Personal Computer Processor Marketwhich could be an incredible opportunity as AI migrates from the data center to the devices we use every day.

Outside of its top 5, the iShares ETF holds a number of other stocks essential for the AI ​​industry. Semiconductor Manufacturing in Taiwan makes half of the world’s chips, including those made by Nvidia and AMD. Micron Technologyon the other hand, manufactures memory and storage chips which are essential to processing AI workloadsIts 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 explosive demand for chips in segments such as smartphones, cloud computingenterprise 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:

1. Scenario 1:The ETF offers an annual yield of 11.7% over time, matching its long-term average.
2. Scenario 2:The ETF offers an annual return of 18.5% over time (midpoint of scenarios 1 and 3).
3. Scenario 3:The ETF offers an annual return of 25.3% over time, corresponding to its 10-year average.

Starting balance

Compound annual return

It’s time to hit $1 million

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 places that will be worth $200 trillion by 2030!

That being said, this ETF will almost certainly underperform if AI fails to meet 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 ultimately becomes a more important value creator than AI hardware, which could shift gains to actions outside the electronic chip sectorThis is why it is best to buy the iShares ETF as part of a balanced portfolio.

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.

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