2026 Semiconductor ETF Investment Strategy: AI Demand Expansion and Industry Outlook

Demand for AI training/inference GPUs and HBM used in AI servers is growing explosively. Global big tech companies' AI data center capital expenditure (CAPEX) is expected to increase by more than 30% compared to 2025, which is positive for the semiconductor sector as a whole.

Demand for automotive semiconductors continues to grow steadily with the expansion of autonomous driving and electric vehicles. The semiconductor value per vehicle is increasing annually, driving revenue growth for analog and MCU companies such as NXP, Infineon, and Texas Instruments.

As TSMC's 2nm process mass production and Samsung Electronics' GAA (Gate-All-Around) process competition intensify, the technology gap between foundry companies can directly impact ETF returns.

However, intensifying US-China semiconductor tensions, concerns about AI investment excess, and memory price cycles could pose downside risks that warrant caution.

The iShares Semiconductor ETF (SOXX) tracks the ICE Semiconductor Index and invests in approximately 30 stocks with diversification. Using a modified market-cap weighting approach, it has relatively less large-cap concentration and provides balanced exposure to various semiconductor companies including Intel, Broadcom, NVIDIA, and Texas Instruments. Its expense ratio is 0.35%.

The VanEck Semiconductor ETF (SMH) tracks the MVIS US Listed Semiconductor 25 Index using market-cap weighting. It has high concentration in top holdings, with large positions in NVIDIA and TSMC, making it the most direct beneficiary of AI themes. Its expense ratio is 0.35%, and it notably includes US-listed ADRs (TSMC, ASML).

The SPDR S&P Semiconductor ETF (XSD) tracks the S&P Semiconductor Select Industry Index as an equal-weight ETF. By allocating the same weight to both large-cap and small/mid-cap stocks, it has a higher proportion of smaller semiconductor companies. Its expense ratio is 0.35%, making it suitable for investors looking to capture small/mid-cap growth momentum.

If you want to focus on the AI theme, SMH is the best fit. With high allocations to NVIDIA and TSMC, it can capture AI semiconductor growth most directly. However, the high concentration in top holdings makes it sensitive to individual company earnings.

For balanced investment across the semiconductor sector, consider SOXX. Its modified market-cap weighting reduces individual stock concentration while centering on large semiconductor companies, striking a balance between stability and growth potential.

If you seek the growth potential of small/mid-cap semiconductor companies, XSD is attractive. Its equal-weight approach gives equal exposure to undervalued smaller semiconductor companies compared to large caps, offering the potential for outperformance during sector-wide recoveries.

For diversification, a 7:3 or 6:4 split between SOXX and SMH is also a good strategy. This allows you to pursue both high AI-theme growth and stable returns from the broader semiconductor sector simultaneously.

Semiconductor ETFs exhibit high volatility due to their tech stock characteristics. With many stocks trading at elevated valuations following the 2024-2025 AI rally, dollar-cost averaging is more appropriate than lump-sum investing.

US-China semiconductor export regulations and geopolitical risks should be continuously monitored. SMH, which has higher exposure to overseas companies including TSMC and ASML, may be relatively more affected by regulations.

Memory semiconductor price cycles are also a key variable. Even with strong HBM demand, weakness in commodity DRAM and NAND prices could negatively impact returns for ETFs with high memory company weightings.

It is recommended to keep semiconductor ETF allocation within 10-20% of the total portfolio and adjust the weighting through quarterly rebalancing.