Semiconductor Sector on a Roll: SMH's Case for Outperformance Amid Macroeconomic Tailwinds

The semiconductor industry is experiencing a renaissance driven by artificial intelligence (AI), data center expansion, and global technological adoption. At the forefront of this boom is the VanEck Semiconductor ETF (SMH), which has delivered staggering returns over the past decade and appears poised to outperform broader markets in the coming years. With macroeconomic tailwinds-including government subsidies, interest rate cuts, and capital inflows-SMH's trajectory reflects both sector-specific momentum and systemic shifts in global tech demand.

A Decade of Dominance: SMH's Historical Performance

From 2010 to 2025, SMH has been a standout performer, posting a 10-year total return of 1,225.20% and a compound annual growth rate (CAGR) of 29.18%, according to FinanceCharts performance data. This outpaces the S&P 500's roughly 130% total return over the same period. The ETF's resilience during economic cycles is equally compelling: while 2022 saw a -33.53% drawdown, the subsequent rebound in 2023 (73.38% return) and 2024 (39.10% return) underscore its cyclical nature and recovery potential (per FinanceCharts). Year-to-date in 2025, SMH has returned 18.28%, outpacing the S&P 500's 11.42% and the Nasdaq's 13.09% YTD performance, as noted in a Nasdaq analysis.

This dominance is not accidental. SMH's portfolio, weighted toward industry leaders like NVIDIA, Broadcom, and Qualcomm, benefits from the AI revolution. For instance, NVIDIA's YTD gain of 42% as of May 2025, according to Nasdaq100Pro, has been a key driver of SMH's performance, reflecting the insatiable demand for AI accelerators in data centers.

Macroeconomic Tailwinds: AI, Capex, and Policy

The semiconductor sector's growth is underpinned by three macroeconomic forces:

1. AI and Data Center Demand:
   Generative AI has become a $150 billion revenue driver in 2025, with AI accelerators accounting for over 50% of semiconductors in data centers, according to Deloitte Insights. This surge has spurred capital expenditures (Capex) by leading manufacturers. TSMC, for example, plans to invest $38–42 billion in 2025 to expand advanced manufacturing, while Micron's Capex is projected to rise 75% YoY to $13.5–14.5 billion, per a Techovedas analysis. Such investments are critical to meeting demand for High Bandwidth Memory (HBM) and other AI-specific chips.

2. Government Subsidies and Geopolitical Strategy:
   The U.S. CHIPS and Science Act has reshaped the industry, with Intel alone allocating $7.87 billion to eligible projects under the program, according to an Economic Times analysis. These subsidies have validated investor confidence, as evidenced by rising stock prices for CHIPS Act beneficiaries. Globally, South Korea, China, and Japan are also ramping up funding, creating a competitive landscape that favors scale and innovation, as reported by Semiengineering.

3. Interest Rates and Capital Inflows:
   The Federal Reserve's rate cuts in 2025 have further fueled R&D spending in semiconductors, according to Onwish.ai. Meanwhile, Q3 2025 saw a record $377 billion in ETF inflows, according to an iShares flow report, with semiconductor ETFs like SMH, SOXX, and SOXQ capturing significant capital. Investors are betting on AI-driven growth, with SMH's low expense ratio and diversified exposure to tech leaders making it a preferred vehicle.

Sector Momentum vs. Structural Risks

While the outlook is bullish, risks persist. Higher construction costs in North America and Europe-where building a new fab is 10% more expensive than in Taiwan-pose challenges to scaling production, as noted in a McKinsey analysis. Additionally, geopolitical tensions and trade policies, such as U.S. export controls on China, have created supply chain uncertainties, writes an FPRI article. However, these headwinds also highlight the sector's strategic importance, with governments and corporations prioritizing resilience over cost efficiency.

Why SMH Outperforms the Broader Market

SMH's outperformance relative to the S&P 500 and Nasdaq is not merely a function of sector strength but also of compounding from high-growth subsectors. For example, while the Nasdaq's 10-year CAGR of 14.9%, per TradeThatSwing, is impressive, it includes a broader mix of industries, diluting the impact of AI-driven gains. SMH's focus on semiconductors-where R&D spending now accounts for 52% of EBIT (per Deloitte Insights)-positions it to capitalize on innovation cycles more directly.

Conclusion: A Long-Term Bet on Tech's Future

The semiconductor industry is on track to reach $1 trillion in sales by 2030, according to an Infosys outlook. For investors, SMH offers a concentrated play on this growth, with historical performance and macroeconomic trends aligning to support its outperformance. While volatility is inevitable, the sector's long-term trajectory-bolstered by policy, capital, and technological adoption-makes SMH a compelling case for those seeking exposure to the next phase of the tech revolution.