Artificial intelligence (AI) could be the most transformational technology in a generation. AI chatbots like OpenAI’s ChatGPT can already answer complex questions and instantly generate computer-generated text, images, and even new software code on command. The technology will only improve over time, but development is not cheap as it requires huge data centers filled with specialized chips from suppliers and others Nvidia.
Morgan Stanley predicts that Microsoft, Amazon, AlphabetAnd Metaplatforms alone, we will spend a combined $300 billion on AI data center infrastructure and chips by 2025. That will benefit Nvidia, but significant amounts will also flow to other chip makers, chip designers and network equipment suppliers.
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It won’t be easy to pick winners and losers, but there’s good news in that regard: investors don’t necessarily have to do that. The iShares Semiconductor ETF (NASDAQ: SOXX) is an exchange-traded fund (ETF) packed with virtually all the hardware stocks involved in the AI revolution. He can make the choice for you and here’s why it could be a great purchase for 2025.
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An ideal ETF for the boom in AI spending
It’s common for ETFs to hold hundreds or even thousands of individual stocks, but since this one is highly specialized, it only contains 30 names. It invests exclusively in companies that design, manufacture and distribute semiconductors, making it highly concentrated. Therefore, investors should only buy it as part of a diversified portfolio of other funds and individual stocks.
That said, the iShares ETF can give investors all the exposure they need in the hardware segment of the AI spending boom. The top five holdings account for 38.3% of the total portfolio value, and include some of the biggest players in this space:
|
Stock |
iShares ETF Portfolio Weighting |
|---|---|
|
1. Broadcom |
11.42% |
|
2. Nvidia |
7.83% |
|
3. Advanced micro devices |
7.11% |
|
4. Qualcomm |
6.11% |
|
5. Texas instruments |
5.82% |
Data source: iShares. Portfolio weights are accurate as of December 24, 2024 and are subject to change.
Broadcom makes AI accelerators (a type of chip) for large-scale customers such as Alphabet, which they use as an alternative to Nvidia’s chips. Accelerators can be the cheaper option, and tech giants can tailor them to their needs. Broadcom also makes networking equipment for data centers, including switches that control how quickly information travels between chips and devices.
Nvidia still makes the best AI chips in the world. It recently launched its new Blackwell graphics processing units (GPUs) for data centers, offering up to 30 times more performance than its original flagship H100 GPU. The Blackwell GB200 will likely be the most sought-after AI chip next year, and early sales estimates make Nvidia stock look cheap right now.
Advanced Micro Devices is trying to compete with Nvidia in the data center GPU market. It plans to supply a Blackwell competitor in the second half of 2025, under the name MI350. But while AMD is chasing Nvidia in the data center industry, it is already a leading supplier of AI chips for personal computers. This could be a major growth area in the future as more and more AI workloads shift from data centers to devices.
Outside of the top five holdings, the iShares ETF has other important chip stocks. They include Taiwanese semiconductor manufacturingwhich manufactures many of the AI chips designed by Nvidia and AMD, and Micron technologywhich delivers industry-leading memory and storage chips for AI workloads.
The iShares ETF can help investors beat the S&P 500
The iShares ETF has generated a compound annual return of 11.2% since its inception in 2001. That’s better than the average annual return of 8.5% in the United States S&P500 during the same period.
However, the ETF has risen an average of 22.7% per year over the past decade thanks to new technologies such as cloud computing, enterprise software, smartphones and AI, which have increased demand for chips. The S&P returned just 13.7% annually over the same period.
It is unlikely that the iShares ETF – or any fund for that matter – can grow at a compound annual rate of more than 20% indefinitely. However, thanks to AI, the chip sector could currently be experiencing a golden age. Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion in the coming years to upgrade their infrastructure to meet demand from AI developers. Therefore, the massive spending Morgan Stanley has forecast for 2025 could grow even further in 2026, 2027 and beyond.
On the other hand, if AI software isn’t as revolutionary as experts predict, tech giants could reduce their spending on chips and other hardware. In that scenario, many of the stocks in the iShares ETF could lose a significant amount of value.
Therefore, as I said before, investors should only buy this ETF as part of a balanced portfolio of other funds or individual stocks.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, former director of market development and spokeswoman for Facebook and sister of Mark Zuckerberg, CEO of Meta Platforms, is a member of The Motley Fool’s board of directors. Suzanne Frey, a director at Alphabet, is a member of The Motley Fool’s board of directors. Anthony Di Pizio has no positions in the stocks mentioned. The Motley Fool holds and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, Texas Instruments, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and recommends the following options: long January 2026 $395 calls to Microsoft and short January 2026 $405 calls to Microsoft. The Motley Fool has a disclosure policy.
