The Long-Term Compounding Power of Semiconductor ETFs: Why VanEck Semiconductor ETF (SMH) Stands Out as a High-Conviction Growth Vehicle for 2025 and Beyond

The semiconductor industry has long been a cornerstone of technological progress, but its role in enabling artificial intelligence (AI), cloud computing, and advanced manufacturing has elevated it to a strategic asset class. For forward-looking investors, the VanEck Semiconductor ETF (SMH) offers a compelling vehicle to capitalize on this transformation. Over the past decade, SMH has demonstrated exceptional compounding power, driven by its concentration in industry leaders and its alignment with the AI-driven demand surge. Despite its volatility, the fund's performance and positioning make it a high-conviction bet for those willing to tolerate short-term turbulence for long-term gains.

A Decade of Compounding: SMH's 10-Year Track Record

From 2015 to 2025, SMH delivered a 10-year annualized return of 30.31%, translating to a cumulative total return of 1,367.79%. This outperformance is a testament to the semiconductor sector's resilience and growth potential, even amid cyclical downturns. For instance, while the fund plummeted by -33.53% in 2022, it rebounded with a staggering 73.38% gain in 2023, underscoring its capacity to recover and thrive in dynamic markets. Such volatility, while daunting, reflects the sector's sensitivity to macroeconomic shifts and technological breakthroughs-a duality that rewards patient, strategic investors.

Concentration in Industry Titans: NVIDIA and TSM as Growth Engines

SMH's performance is underpinned by its heavy weighting in semiconductor giants like NVIDIA (NVDA) and Taiwan Semiconductor Manufacturing Company (TSM).

As of early 2025, NVIDIA alone accounted for 18.85% of the ETF's portfolio, with TSM contributing 9.79%. Together, the top three holdings represent over 36% of the fund, a concentration that amplifies both upside potential and downside risk. However, this focus on market leaders is justified by their dominance in AI and advanced manufacturing. NVIDIA's GPUs power AI training models, while TSM's cutting-edge fabrication capabilities enable the production of next-generation chips. As global demand for AI infrastructure accelerates, these firms-and by extension, SMH-are poised to benefit disproportionately.

Volatility as a Double-Edged Sword

SMH's high volatility is both a challenge and an opportunity. The fund's beta of 1.52 and 3-year standard deviation of 49.24% highlight its heightened sensitivity to market swings compared to broader indices. This volatility stems from the semiconductor sector's cyclical nature and its reliance on capital-intensive innovation. Yet, for investors with a long-term horizon, such fluctuations are less a deterrent than a feature of compounding. The key lies in strategic allocation: using downturns as buying opportunities and leveraging the sector's growth tailwinds during upswings.

Market Capitalization and Liquidity: A Growing Force

As of December 2025, SMH commands a market capitalization of $36.37 billion USD, reflecting robust investor confidence and liquidity. This scale ensures that the ETF remains a liquid and accessible vehicle for both institutional and retail investors. Recent data also shows a steady increase in shares outstanding-from 98.6 million in October 2025 to 103.3 million by November 2025 -indicating sustained inflows. Meanwhile, the ETF's share price traded between $348.31 and $354.39 in November 2025, signaling strong demand despite macroeconomic uncertainties.

Strategic Allocation in the AI Era

The semiconductor industry's role in AI is no longer speculative-it is foundational. As AI models grow in complexity and adoption, the demand for high-performance chips will only intensify. SMH's portfolio is uniquely positioned to capitalize on this trend. NVIDIA's dominance in AI hardware, TSM's leadership in chip manufacturing, and the broader index's exposure to innovation-driven firms create a flywheel effect. For investors seeking to align with the AI revolution, SMH offers a concentrated, high-conviction pathway.

Conclusion: Balancing Risk and Reward

While SMH's volatility demands caution, its long-term returns, strategic concentration, and alignment with AI-driven demand make it an indispensable tool for forward-looking portfolios. The fund's 10-year performance demonstrates that compounding thrives in sectors at the forefront of technological disruption. For those willing to navigate short-term turbulence, SMH represents not just an investment in semiconductors, but in the very infrastructure of the AI-powered future.