Why the VanEck Semiconductor ETF (SMH) is Poised to Outperform the S&P 500 in 2026

The VanEck Semiconductor ETF (SMH) has emerged as a standout performer in 2025, outpacing the S&P 500 by a wide margin. As of November 2025, SMH delivered a year-to-date return of 42.39%, according to data, compared to the S&P 500's 15.67%. This outperformance is not a fluke but a reflection of structural shifts in the semiconductor industry, driven by the explosive growth of artificial intelligence (AI). With AI demand set to accelerate in 2026, SMH's concentrated exposure to the sector's most innovative firms positions it to outperform the broader market, despite its higher volatility and valuation risks.

AI as the Catalyst for Semiconductor Growth

The semiconductor industry is undergoing a transformation fueled by AI. In Q3 2025, the global semiconductor market surpassed $200 billion for the first time, with AI chips accounting for a significant portion of this growth. NVIDIA, a top holding in SMH, led the charge with $57.0 billion in revenue, driven by surging demand for data center AI infrastructure. The AI chip market is projected to grow at a 12% compound annual rate in 2025, with advanced node production (under 7nm) operating at over 90% utilization.

This trend is set to intensify in 2026. Semiconductor equipment sales are forecasted to reach $145 billion, driven by investments in leading-edge logic and advanced packaging technologies. AI is also reshaping semiconductor design and manufacturing, with tools like Electronic Design Automation (EDA) integrating AI to enhance efficiency. Meanwhile, edge AI is gaining traction, spurring demand for low-power machine learning accelerators in consumer electronics and industrial IoT.

SMH's Strategic Positioning

SMH's outperformance stems from its focus on the 25 largest U.S.-listed semiconductor firms, many of which are at the forefront of AI innovation. The fund's top ten holdings account for over two-thirds of its assets, creating a high concentration in companies like NVIDIA, Taiwan Semiconductor Manufacturing (TSMC), and Broadcom. These firms are directly benefiting from the AI boom: TSMC, for instance, dominates advanced chip manufacturing, while Broadcom supplies critical networking and storage solutions for AI data centers.

This concentration amplifies SMH's exposure to AI-driven growth. Over the past decade, SMH has delivered an annualized return of 30.62%, far outpacing the S&P 500's 14.48%. While the fund's high beta of 1.52 and expense ratio of 0.35% make it riskier than the S&P 500 ETF (SPY), its volatility is justified by the sector's growth potential. As AI adoption expands, the semiconductor industry's role in enabling next-generation technologies-from autonomous vehicles to generative AI-will only strengthen.

Valuation Metrics and Growth Justification

Critics may argue that SMH's valuation appears stretched, with a price-to-earnings (P/E) ratio of 36.04, compared to the S&P 500's forward P/E of 22.8. However, this premium reflects the sector's superior earnings growth prospects. The S&P 500's forward P/E, while elevated, is supported by modest earnings growth expectations of 8% for Q3 2025 and 10.9% for 2025. In contrast, AI-driven demand is expected to propel semiconductor earnings at a much faster pace. For example, High Bandwidth Memory (HBM) sales are projected to surge from $15.2 billion in 2024 to $32.6 billion by 2026, driven by AI infrastructure needs.

Moreover, SMH's top holdings exhibit strong price-to-sales (P/S) multiple expansion, a sign of investor confidence in their ability to monetize AI-driven demand. While this suggests potential overvaluation, it is a common feature of high-growth sectors. The U.S. CHIPS Act and Intel's $100 billion investment in domestic manufacturing further underscore the industry's strategic importance, reducing long-term risks.

Risks and Mitigants

The semiconductor industry is not without challenges. Supply chain disruptions, memory shortages, and foundry price hikes could dampen growth in early 2026. However, these risks are largely short-term and do not negate the long-term tailwinds from AI. Additionally, SMH's high concentration means its performance is closely tied to the success of its largest holdings. A slowdown in AI adoption or a misstep by a key player could hurt returns.

That said, the broader market's reliance on semiconductors for AI innovation makes SMH a compelling bet. As AI becomes a cornerstone of global economic growth, the semiconductor industry's role will only expand. For investors seeking exposure to this transformation, SMH offers a concentrated and liquid vehicle to capitalize on the AI supercycle.

Conclusion

The VanEck Semiconductor ETF is uniquely positioned to outperform the S&P 500 in 2026 due to its alignment with the AI-driven semiconductor boom. While its valuation appears rich, the sector's growth trajectory-fueled by demand for advanced chips, AI integration, and edge computing-justifies the premium. For those willing to tolerate higher volatility, SMH represents a high-conviction play on one of the most transformative forces in modern technology.