BlackRock manages more than $10 trillion in client assets, making it the largest asset manager in the world. Around $3.3 trillion of this is parked in its subsidiary iShares, which operates over 1,400 exchange-traded funds (ETFs).

The iShares Semiconductor ETF (SOXX 2.68%) is one of these funds and generates strong returns thanks to its large holdings in leading artificial intelligence (AI) chip stocks such as NVIDIA And Advanced micro devices.

Image source: Getty Images.

The iShares Semiconductor ETF completed a stock split earlier this year

The iShares ETF achieved an average annual return of 25.4% over the last decade, significantly outperforming the S&P500 Index, which gained an average of 13.2% per year over the same period. That drove the ETF to a share price of around $680 in March, making it a bit expensive for investors with small portfolios.

As a result, iShares conducted a 3-for-1 stock split that tripled the number of shares outstanding and organically reduced the price per share by two-thirds. Stock splits do not change the value of the underlying asset, but investors can now buy a share of the ETF for as little as $231.

Chipmakers are at the heart of the AI ​​revolution. Without them, neither tech giants nor startups would be able to develop powerful AI models. Therefore, this ETF should continue to generate positive returns. It could turn a $500 per month investment into $1 million over the long term.

An easy way to invest in the semiconductor industry

The iShares ETF was founded in 2001. It manages $14.8 billion on behalf of its investors, spread across 30 different chip stocks. However, the focus is on its five largest holdings, which account for 38 percent of the total portfolio value:

Data source: iShares. Portfolio weightings are as of August 15, 2024 and are subject to change.

Broadcom is a multifaceted AI company. It makes data center connectivity and networking equipment that is increasingly important to operators running thousands of graphics processing units (GPUs) to facilitate AI development. Broadcom also owns Symantec, which integrates AI into its cybersecurity tools, and VMware, which sells software that helps developers efficiently distribute their data center infrastructure.

Nvidia is developing the industry’s most powerful data center GPUs, which are responsible for the most advanced AI models to date. Demand continues to outstrip supply, leading to an increase in the company’s revenue, and this trend is likely to continue for the foreseeable future.

AMD has become a worthy competitor to Nvidia in the data center space, but it is also a leader in the semiconductor market for AI-enabled PCs. This could be a significant growth driver for the company in the coming years.

In addition to its five largest holdings, the iShares ETF holds a number of other important chip stocks. Semiconductor manufacturing in TaiwanFor example, it produces many of the chips developed by Nvidia and AMD. Then there are Micron technologywhich is experiencing increasing demand for memory and storage chips due to the AI ​​boom.

Turn $500 a month into $1 million

The iShares ETF has delivered an average annual return of 12.1% since its inception in 2001. As mentioned above, this annual return has accelerated to 25.4% over the past decade due to the rapid adoption of technologies such as smartphones, enterprise software, cloud computing and artificial intelligence, which require ever-increasing computing power.

The table shows the potential returns an investor could earn with $500 per month over 10, 20 and 30 years, based on three annual growth rates:

Calculations by the author.

There is a good argument that the stock market performance of the last 10 years has shown a trajectory that is unlikely to be repeated in the future. At some point, the rule of large numbers kicks in to limit future gains. For example, if Nvidia stock increased 25.4% annually over the next 30 years, the company would eventually be valued at $2.7 billion. quadrillion – or 900 times its current value – which is not realistic.

But even if the ETF returns to its 12.1% annual return, it could still turn a $500 monthly investment into over $1 million within 30 years.

Still, AI is likely to add significant value from here, which could cause the ETF to outperform its long-term average return. Nvidia CEO Jensen Huang, for example, believes data center operators will spend $1 trillion over the next five years to modernize and expand their infrastructure, and many of the stocks in this ETF will directly benefit from that.

In addition, PwC expects that the widespread adoption of artificial intelligence will add a whopping $15.7 trillion to the global economy by 2030, which in turn will boost demand for innovations in the chip sector.

Of course, if AI fails to live up to expectations, most of the stocks in the iShares ETF could decline in value, leading to a period of underperformance. That’s why it’s always a good idea to own this ETF as part of a balanced portfolio that is less dependent on AI’s success or failure.