This Is the Best-Performing ETF of the Last 10 Years. Is It Still a Buy?

Exchange-traded funds (ETFs) are a great option for investors.

Instead of having to choose individual stocks, ETFs allow you to invest in a collection of stocks, often grouped by theme, sector, or geography, with one simple investment. ETFs can be traded easily like stocks, and typically only cost the owners a fraction of a percent for the management fee, known as the expense ratio. This makes them a better alternative to mutual funds, which tend to cost more and are more difficult to trade.

Since they give you exposure to several stocks at once, ETFs don't tend to offer as much upside potential as individual stocks, but several have been big winners over the last decade. Take a look at the chart below. You'll probably notice a pattern.

SMH data by YCharts

As you can see, four of the top five ETFs of the last decade track semiconductor stocks, and the last one, the Vanguard Information Technology ETF, has significant exposure to semiconductor stocks.

A decade of semiconductor stocks

So why have semiconductor stocks been so dominant over the last decade? It's more than just artificial intelligence (AI), though that's been a major part of the narrative over the last two years. Still, you can see from the chart that the sector has gained for much of the last decade.

Semiconductors are closely linked to technology, and none of the devices you use or the data centers that run cloud and AI programs behind the scenes can run without them. The need for these chips has proliferated over that time. Products like appliances and automobiles now require semiconductors and devices like smartphones have become more advanced and complex.

Technology is often where the growth is in the economy, and semiconductors provide the infrastructure for that industry.

However, not all semiconductor ETFs are equal, and the VanEck Semiconductor ETF (NASDAQ: SMH) has been the clear winner of the group. Let's take a closer look at the ETF and why it has been such a top performer.

Image source: Getty Images.

What's in the VanEck Semiconductor ETF?

The VanEck Semiconductor ETF is the only ETF to have gained more than 10x over the last decade.

The fund now has total net assets of $24.7 billion, and its top three holdings are Nvidia at 22.4% of the fund, Taiwan Semiconductor Manufacturing at 13.7%, and Broadcom at 7.8%. These three holdings make up nearly half of the fund. All three of those stocks have had strong years with Nvidia up 186%, TSMC up 96%, and Broadcom up 55%.

The fund seeks to replicate the performance of the MVIS US Listed Semiconductor 25 Index, which aims to track the overall performance of the semiconductor production and equipment industry.

The difference between the VanEck Semiconductor ETF and its peers above is that the VanEck is more concentrated in the largest chip stocks like Nvidia and Taiwan Semi, which has served it well, considering the success of those stocks.

Is the VanEck Semiconductor ETF a buy?

The VanEck Semiconductor ETF has continued to thrive this year, up 43% year to date. You might think that after a decade of superior returns, the fund would look overpriced, but it's not as expensive as you might think, trading at a price-to-earnings ratio of 43.

While that's not cheap, considering the explosive growth in AI and its top stocks like Nvidia and Taiwan Semi, the valuation looks reasonable.

The ETF looks well positioned to capitalize on the growth in AI as big tech companies and start-ups fight to get an edge in the potentially revolutionary technology and as they race toward artificial general intelligence.

It's a good bet that the VanEck Semiconductor ETF will continue to outperform the overall market.

Should you invest $1,000 in VanEck ETF Trust - VanEck Semiconductor ETF right now?

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Jeremy Bowman has positions in Broadcom. The Motley Fool has positions in and recommends Nvidia, Taiwan Semiconductor Manufacturing, and iShares Trust - iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.