Semiconductor and AI-focused ETFs continue attracting strong inflows amid accelerating AI infrastructure spending. VanEck Semiconductor ETF (NYSEARCA: SMH) has delivered approximately 61.4% YTD returns with Nvidia (Nasdaq: NVDA) at 15.4% of holdings, though rising concentration, valuation expansion, and correlation risks remain key investor concerns.

Key Highlights

  • VanEck Semiconductor ETF (NYSEARCA: SMH) has delivered approximately 61.4% year-to-date returns and more than 145% one-year gains amid the AI infrastructure boom.
  • Nvidia (NASDAQ: NVDA) represents roughly 15.4% of SMH holdings, while the top 10 positions account for approximately 72.1% of the portfolio.
  • SMH has attracted nearly USD 397 million in recent net inflows as institutional investors continue increasing AI semiconductor exposure.
  • Semiconductor ETFs are increasingly viewed as direct AI infrastructure Investment vehicles rather than cyclical technology products.
  • Software-focused ETFs such as iShares Expanded Tech-Software Sector ETF (BATS: IGV) are gaining attention as investors anticipate the next phase of AI monetisation.

From Cyclical Technology to AI Infrastructure Proxy

The semiconductor sector has undergone one of the most dramatic structural re-ratings in modern Equity markets. For much of the past decade, semiconductor companies were valued primarily as cyclical businesses tied to smartphone shipments, PC refresh cycles, and memory pricing Volatility. The artificial intelligence investment boom has fundamentally altered that perception.

Today, semiconductor companies increasingly occupy the strategic centre of the global AI economy.

This transformation is most clearly reflected in the performance of semiconductor-focused Exchange-traded funds. VanEck Semiconductor ETF (NYSEARCA: SMH), one of the most widely followed semiconductor ETFs globally, has emerged as a direct proxy for the AI infrastructure trade. The fund’s approximately 61.4% year-to-date return, more than 145% one-year gain, and nearly 386% five-year performance have dramatically outpaced the broader market.

Yet the extraordinary returns also expose a growing debate around concentration risk, valuation expansion, and the sustainability of AI-related Capital-expenditure/">Capital Expenditure.

Why VanEck Semiconductor ETF (NYSEARCA: SMH) Has Become a Core AI Trade

Unlike diversified index-funds/">Index Funds such as Vanguard S&Amp;P 500 ETF (NYSEARCA: VOO) or SPDR S&P 500 ETF Trust (NYSEARCA: SPY), SMH is intentionally concentrated.

The ETF tracks the MVIS US Listed Semiconductor 25 Index and holds only around 25 to 30 semiconductor companies. Its structure effectively concentrates investor exposure into the most strategically important segments of the AI hardware ecosystem.

Nvidia (NASDAQ: NVDA), which has become synonymous with the AI infrastructure boom, represents approximately 15.4% of the portfolio alone. Taiwan Semiconductor Manufacturing Company (NYSE: TSM), Broadcom Inc. (NASDAQ: AVGO), Advanced Micro Devices (NASDAQ: AMD), and Micron Technology Inc. (NASDAQ: MU) collectively form a substantial portion of the remainder.

Importantly, the top 10 holdings account for roughly 72.1% of total fund weight.

That level of concentration makes SMH fundamentally different from broad-market ETFs. Investors are not purchasing diversified equity exposure with modest semiconductor participation. Rather, they are making an amplified bet on the continuation of the AI infrastructure cycle.

The AI Semiconductor Value Chain Driving SMH Performance

The structure of SMH reflects the full AI hardware ecosystem.

Nvidia (NASDAQ: NVDA) provides the GPU compute architecture underpinning modern AI Training and inference. Taiwan Semiconductor Manufacturing Company (NYSE: TSM) manufactures advanced chips for Nvidia, Apple (NASDAQ: AAPL), AMD, and other leading semiconductor designers.

Broadcom Inc. (NASDAQ: AVGO) supplies custom AI accelerators and networking semiconductors increasingly used by hyperscale cloud providers. Micron Technology Inc. (NASDAQ: MU) remains critical through its High Bandwidth Memory products that support AI accelerators.

ASML Holding (NASDAQ: ASML), meanwhile, occupies an irreplaceable position in extreme ultraviolet lithography systems necessary for advanced chip production.

Collectively, these companies form what investors increasingly perceive as the infrastructure layer of the artificial intelligence economy.

That narrative helps explain why SMH has evolved beyond a traditional semiconductor ETF into a direct AI thematic vehicle.

Nvidia (NASDAQ: NVDA) and the Amplified Mega-Cap Exposure Effect

The concentration dynamics become especially clear when comparing Nvidia’s weighting inside SMH versus broader market ETFs.

In Vanguard S&P 500 ETF (NYSEARCA: VOO), Nvidia currently represents roughly 8.1% of holdings. In SMH, the weighting rises to approximately 15.4%, almost double the exposure.

That amplification materially changes the ETF’s volatility profile.

A strong Nvidia rally disproportionately benefits SMH investors relative to broad-market ETF holders. Conversely, periods of semiconductor weakness or valuation compression generate materially larger drawdowns.

This asymmetry largely explains SMH’s outsized long-term returns during the AI boom. However, it also means investors are increasingly exposed to single-company execution risk, hyperscaler spending cycles, and semiconductor valuation fluctuations.

Why Institutional Flows Continue Supporting Semiconductor ETFs

Despite valuation concerns, investor appetite for semiconductor ETFs remains robust.

Recent net inflows of approximately USD 397 million into SMH suggest institutional investors continue treating AI semiconductor exposure as a strategic portfolio allocation rather than a short-term tactical trade.

ETF inflows themselves can also reinforce price momentum.

As capital enters SMH, the fund mechanically purchases its underlying holdings according to index weightings. Because Nvidia (NASDAQ: NVDA), Broadcom Inc. (NASDAQ: AVGO), and Taiwan Semiconductor Manufacturing Company (NYSE: TSM) carry large portfolio weights, a disproportionate amount of new capital flows directly into those names.

That creates a self-reinforcing cycle:

  • Rising semiconductor prices increase index weightings.
  • Higher weightings attract more passive capital inflows.
  • ETF inflows mechanically purchase additional shares.
  • Mechanical buying further supports valuations.

The mechanism resembles broader passive-investing dynamics seen across the S&P 500, though it operates with greater intensity in concentrated thematic ETFs.

Why iShares Expanded Tech-Software Sector ETF (BATS: IGV) Is Entering the Conversation

While semiconductor ETFs dominated the early phase of the AI investment cycle, investor attention is increasingly shifting toward software monetisation opportunities.

The iShares Expanded Tech-Software Sector ETF (BATS: IGV) has therefore become increasingly relevant.

IGV provides exposure to enterprise software and cloud application companies including Microsoft Corporation (NASDAQ: MSFT), Salesforce Inc. (NYSE: CRM), Oracle Corporation (NYSE: ORCL), CrowdStrike Holdings Inc. (NASDAQ: CRWD), and Palantir Technologies Inc. (NASDAQ: PLTR).

The investment logic differs from semiconductor infrastructure exposure.

SMH benefits primarily from the physical buildout of AI computing capacity. IGV, by contrast, benefits from the commercialisation and monetisation of AI applications once infrastructure deployment matures.

Historically, major technology investment cycles eventually transition from infrastructure providers toward application-layer winners. Investors increasingly believe artificial intelligence could follow a similar trajectory.

The Growing Concentration Risk Debate

The strong performance of semiconductor ETFs has inevitably revived concerns around concentration risk and speculative excess.

SMH’s top-10 concentration of more than 72% means Diversification benefits remain limited relative to broader index funds. Correlation risk also remains elevated because nearly all holdings depend on similar macro drivers, including hyperscale AI spending, semiconductor Demand, and data-centre capital expenditure.

Geopolitical risks further complicate the outlook.

A meaningful portion of the semiconductor Supply chain remains concentrated in Taiwan and South Korea, leaving the broader AI ecosystem vulnerable to geopolitical disruptions and export restrictions.

Valuation sensitivity also remains a central concern. Many semiconductor stocks now trade at elevated Earnings multiples that imply sustained AI-driven demand growth for years ahead.

Any slowdown in hyperscaler capital expenditure, AI monetisation challenges, or supply-demand imbalances could trigger significant multiple compression across the sector.

SMH vs VOO: Different Portfolio Roles

For investors, the distinction between SMH and broad-market ETFs such as VOO is critical.

VOO functions primarily as a diversified long-term Wealth-building vehicle with exposure across healthcare, financials, industrials, consumer sectors, and technology. Semiconductor exposure exists, but within a broader framework.

SMH serves a very different purpose.

It operates as a concentrated thematic allocation designed to amplify exposure to the AI semiconductor cycle. The return potential is substantially higher during strong semiconductor bull markets, but so is volatility and downside risk.

As a result, many institutional portfolio frameworks increasingly position SMH as a satellite allocation rather than a core holding.

Conclusion: Strong AI Momentum, But Risks Are Rising

Semiconductor ETFs remain among the clearest expressions of the artificial intelligence investment boom.

VanEck Semiconductor ETF (NYSEARCA: SMH) continues benefiting from accelerating AI infrastructure spending, strong institutional inflows, and the strategic importance of semiconductor hardware within the global economy.

Yet the same structural characteristics driving exceptional returns — concentration, passive flow amplification, and elevated AI exposure — also increase portfolio risk.

Meanwhile, the growing relevance of software-focused ETFs such as iShares Expanded Tech-Software Sector ETF (BATS: IGV) suggests the AI investment cycle may gradually broaden beyond hardware infrastructure toward enterprise monetisation and application-layer adoption.

For investors, the debate increasingly revolves not around whether AI will reshape the economy, but rather how much concentration risk they are willing to accept in pursuit of that opportunity.