The Best ETF to Invest in AI

Our TrackStar Data confirms what most of us assumed…AI stocks are red hot!

Search volume amongst retail and financial pros skyrocketed for companies like NVIDIA (NVDA) and c3.AI (AI).

While there are some ‘AI’ ETFs out there, they don’t do a particularly good job of investing in the space.

In fact, our data picked up a different tact by financial pros.

Instead of looking at esoteric technology ETFs, they’re focused on semiconductor ETFs, particularly the VanEck ETF (SMH).

It’s a simple story, really…

AI = Processing Power = Semiconductors

So, if you’re looking for an investment strategy straight from the financial pros playbook, here’s why you should consider the SMH.

Key Facts About SMH

• Net assets: $9.0 billion
• 12-month trailing yield: 0.83%
• Inception: May 5, 2000
• Expense ratio: 0.35%
• Number of holdings: N/A

VanEck’s SMH ETF tracks the MVIS® US Listed Semiconductor 25 Index, which is comprised of companies involved in semiconductor production and equipment.

The SMH is the most popular in the market in terms of total assets under management to daily trading volume.

Because of this, investors can either invest directly in the ETF or use options.

While the ETF only holds 25 stocks, it includes the who’s who of the semiconductor world. And anyone familiar with AI and microprocessors is sure to recognize the top holdings on this list.

Source: VanEck

The semiconductor space comprises big players, which is why the weighted average market cap for the ETF is $306 billion.

And that makes sense when you think about it. The startup costs associated with a fabrication facility are astronomical, while design specialists tend to get bought up by the big players.

Source: VanEck

Performance

The average investor probably assumes semiconductor stocks are up hundreds of percentage points over a 5-year period.

In actuality, only a couple of players have done so, and many quite recently, as noted by the YTD gains below.

Source: VanEck

Still, a total 5-year gain of 177% is nothing to sneeze at.

Equally impressive is the 10-year average gain, highlighting the consistent demand.

Competition

If you’re looking for a semiconductor ETF, there are quite a few out there, each with a slightly different flavor.

• iShares Semiconductor ETF (SOXX): Tracks an index of the 30 largest U.S.-listed semiconductor companies, which includes companies based outside the U.S.
• SPDR S&P Semiconductor ETF (XSD):  A modified equal-weight index of semiconductor companies, providing a more balanced exposure across different sizes of companies in the sector.
• First Trust Nasdaq Semiconductor ETF (FTXL): Employs a modified factor weighting methodology to invest in semiconductor companies listed on the Nasdaq, focusing on liquidity, value, volatility, and momentum.
• Invesco Dynamic Semiconductors ETF (PSI): A passively managed ETF that attempts to beat the industry by selecting and weighting 30 semiconductor companies using a proprietary methodology focusing on risk factors, style classification, and stock valuation. 

This list of ETFs is a perfect example of why simpler is better. The last two ETFs, where fund managers try to gain an edge through some methodology tweak, are the worst performers.

Our Opinion 10/10 

We expect AI investments are at the beginning stages of a supercycle.

While not every semiconductor company will benefit, we like the SMH given its heavier weighting towards those companies.

With ample liquidity, it should be a staple for any model portfolio.

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