Identifying the Next Semiconductor Growth Leaders Through Thematic ETFs

The semiconductor industry stands at the forefront of the artificial intelligence (AI) revolution, with demand for high-performance chips surging as enterprises and governments race to deploy generative AI and machine learning technologies. For investors, thematic exchange-traded funds (ETFs) like the SPDR® S&P® Semiconductor ETF (XSD) and the iShares Semiconductor ETF (SOXX) offer a compelling way to capitalize on this transformation. These funds not only provide diversified exposure to the sector but also align with the data-driven growth trajectories of AI-driven innovation.

Diversification and Strategy: XSD and SOXX in Focus

The SPDR Semiconductor ETF (XSD) adopts an equal-weighted approach to its 43 holdings, ensuring no single stock dominates the portfolio. This strategy inherently reduces concentration risk, particularly beneficial in a sector where smaller and mid-cap firms often drive disruptive innovation. By periodically rebalancing, XSD ensures that emerging players in AI semiconductors-such as those developing specialized accelerators or neural network processors-can gain proportional representation.

In contrast, the iShares Semiconductor ETF (SOXX) employs a modified market-cap weighting, capping individual holdings at 10% to mitigate overexposure to large-cap firms. Its top holdings include industry giants like NVIDIA, TSMC, and Broadcom, which are deeply embedded in the AI ecosystem. For instance, NVIDIA's data center segment-driven by demand for its H100 and H200 AI chips-grew 56% year-over-year in 2025, contributing to record sales. Similarly, TSMC's advanced manufacturing processes, including 4-nanometer technology and CoWoS packaging, are critical for producing next-generation AI chips.

AI-Driven Growth: The Underlying Catalyst

The performance of both ETFs in recent quarters underscores the sector's alignment with AI demand. SOXX, for example, surged 13.46% in the latest quarter and delivered a year-to-date return of 41.60%, reflecting the broader industry's tailwinds. This growth is fueled by companies within the ETFs that are explicitly pivoting toward AI.

NVIDIA, a key holding in SOXX, has secured regulatory approval to sell AI chips in China-a market expected to drive significant revenue-and is in advanced discussions with TSMC to scale production of its H200 chips for 2026. Meanwhile, AMD, another major component of SOXX, has aggressively expanded its AI footprint through strategic acquisitions, including Untether AI and Brium, to enhance inference capabilities and software optimization. These moves position AMD as a direct competitor to NVIDIA in the AI training and deployment markets.

TSMC, meanwhile, remains the linchpin of global AI chip production. Its role in manufacturing NVIDIA's H200 chips-and its investments in advanced packaging technologies-highlight its indispensable role in scaling AI hardware. As AI chip sales are projected to exceed $150 billion in 2025, TSMC's dominance in fabrication ensures that both XSD and SOXX benefit from the sector's structural growth.

Why Thematic ETFs Outperform Stock-Picking

For individual investors, thematic ETFs like XSD and SOXX eliminate the need to navigate the complexities of stock selection in a rapidly evolving sector. While pure-play AI chip stocks like NVIDIA or AMD offer high growth potential, they also carry elevated volatility. By contrast, these ETFs balance exposure across fabless designers, integrated device manufacturers, and foundries, capturing the full value chain of AI innovation.

Moreover, the equal-weighted structure of XSD ensures that smaller firms with niche AI capabilities-such as those specializing in edge computing or neuromorphic chips-are not overshadowed by megacaps. This diversification is particularly valuable in a sector where breakthroughs often emerge from unexpected corners.

Conclusion: A Strategic Path to AI-Driven Growth

As the semiconductor industry pivots toward AI, thematic ETFs like XSD and SOXX provide a robust vehicle for investors seeking to participate in this transformation. By combining diversification with strategic exposure to high-growth companies, these funds align with the long-term trends shaping the global economy. For those wary of overconcentration or lacking the expertise to identify individual winners, the data-driven approach of these ETFs offers a compelling alternative.