Why the VanEck Semiconductor ETF (SMH) Is Positioned to Outperform the S&P 500 Over the Next Decade

The case for semiconductor growth is no longer about cyclical demand. It is rooted in a massive, secular market opportunity driven by artificial intelligence. The numbers paint a picture of a structural, multi-trillion-dollar expansion that offers a superior growth runway compared to the broader equity market.

The core engine is the AI data center market itself. This segment is projected to explode from $236.44 billion in 2025 to $933.76 billion by 2030, representing a compound annual growth rate of 31.6%. This isn't just a niche segment; it is the central nervous system for the AI revolution, fueled by surging workloads from generative AI and machine learning.

Zooming out, the total data center infrastructure market provides an even broader canvas. Spending on equipment and infrastructure reached $290 billion in 2024, and analysts project this market will surpass $1 trillion by 2030. The scale of investment is staggering, with the world's largest tech companies-Alphabet, Microsoft, Amazon, and Meta-accounting for nearly $200 billion of that 2024 capex, a figure expected to climb sharply in 2025.

The most compelling indicator of the long-term runway comes from the industry's own leader. Nvidia's CEO has projected that annual spending on AI infrastructure will reach $4 trillion by 2030. This vision frames the current investment surge not as a temporary boom, but as the foundational build-out for a new computing era.

For a growth investor, this sets up a clear thesis. The semiconductor industry is being pulled through a multi-year expansion cycle by a demand driver with no immediate ceiling. The opportunity is not just in chips, but across the entire data center value chain-from servers and storage to power and cooling. This creates a durable, high-growth environment that is fundamentally more attractive than the broader market's historical average.

The Scalable ETF Play: SMH's Structural Advantage

For a growth investor, the question isn't whether semiconductors will grow, but how best to capture that growth. The VanEck Semiconductor ETF (SMH) offers a concentrated, scalable vehicle that directly targets the sector's dominant players and its structural expansion.

The industry's own concentration is the key to this scalability. In 2024, the 35 largest semiconductor companies accounted for 80% of the market. This creates a powerful dynamic: growth is being driven by a relatively small group of leaders, making a focused ETF a logical way to participate. SMH's structure, which caps any single holding at 20% to manage concentration, actually reinforces this by ensuring the fund remains nimble and avoids being overly weighted toward any one giant.

The fund's recent performance underscores its effectiveness in this environment. In 2025, SMH rallied 48.7%, a surge that significantly outpaced the S&P 500's 16.1% gain. This outperformance wasn't just a function of one stock; it was driven by the collective strength of the sector's AI infrastructure leaders. The ETF's top holdings are the very companies powering the data center build-out: Nvidia, Broadcom, and TSMC. These are not peripheral names but the central nervous system of AI hardware.

This setup presents a clear advantage. By holding these dominant firms, SMH captures the high-growth trajectory of the entire AI infrastructure stack-from the processors and networking chips to the advanced manufacturing that makes them. It provides a diversified yet concentrated bet on the sector's leaders, offering a scalable path to participate in the projected $1 trillion market by 2030 without the need to pick individual winners. For investors seeking to ride the AI wave, SMH represents a streamlined, high-conviction vehicle built for this specific growth cycle.

The 10-Year Growth Trajectory and Financial Impact

The financial implications of this AI infrastructure build-out are staggering and span a decade. The semiconductor devices industry itself is on a clear growth path, with a $672 billion market in 2024 and a projected 6.8% compound annual growth rate over the coming years. This steady expansion provides a stable, growing base that will absorb the massive capital flows from data centers. The real acceleration, however, comes from the hyperscaler investment cycle.

The scale of that capital expenditure is unprecedented. By 2030, data centers powered by AI are projected to require $5.2 trillion in capital expenditures. This isn't a one-time build; it's a multi-year investment cycle that will flow directly through the semiconductor supply chain. Every server, storage unit, and networking component in these facilities requires chips, creating a durable, recurring revenue stream for the industry's leaders.

This creates a powerful feedback loop. The initial surge in AI data center spending, which is expected to grow from $236.44 billion in 2025 to $933.76 billion by 2030, drives demand for the most advanced semiconductors. In turn, the industry's own growth-projected to push the total semiconductor devices market toward $1 trillion by 2030-provides the manufacturing capacity and innovation needed to meet that demand. The result is a self-reinforcing cycle of investment and growth.

For the ETF's constituents, this means more than just a one-time sales boost. It signals a decade of sustained, high-growth revenue. The capital expenditure cycle ensures that demand for servers and their underlying chips will remain robust for years, providing visibility and stability that the broader market cannot match. This structural shift from cyclical to secular growth is the financial bedrock of the outperformance thesis.

Risks, Catalysts, and What to Watch

The powerful growth thesis for semiconductors is not without its vulnerabilities. For a growth investor, the key is to identify the forward-looking risks that could derail the AI infrastructure cycle and the catalysts that will confirm its durability.

The primary risk is a disruption to the core AI narrative. The sector's recent outperformance is predicated on the assumption that AI will deliver tangible, scalable value. Any serious issues with AI usefulness or progress could quickly alter spending plans. As noted, the sector is vulnerable to any serious issues with AI usefulness and progress, which would directly impact the multi-trillion-dollar capex cycle. This is the existential risk to the entire thesis.

A more immediate, cyclical risk is the potential for downturns in legacy semiconductor sectors. While AI drives explosive growth in data center chips, other segments like automotive, analog, and smartphone chips are prone to oversupply and price volatility. Evidence shows these legacy sectors faced significant hurdles in 2024 with oversupply impacting profitability. If a cyclical downturn hits these areas hard, it could offset the gains in AI-related segments and create a more volatile earnings environment for the ETF's broader holdings.

On the catalyst side, several factors will drive continued momentum. First, continued AI model advancements are essential to justify ongoing investment. Second, new hyperscaler data center announcements provide concrete visibility into future demand. The sheer scale of planned spending-the four largest hyperscalers are expected to spend more than $350 billion on capex in 2025-acts as a major tailwind. Finally, regulatory decisions on data center power and land use will be critical, as these are emerging as key constraints on growth.

For investors, the primary guardrails are clear. Monitor the progress of AI and the health of legacy semiconductor cycles. Track the hyperscaler capital expenditure plans as the most reliable indicator of near-term demand. The ETF's structure, which caps any single holding at 20%, provides a built-in mechanism to manage concentration risk, but it does not insulate the portfolio from these broader sectoral and technological shifts.