Why The VanEck Semiconductor ETF Rallied Almost 50% in 2025

Shares of The VanEck Semiconductor ETF (NASDAQ: SMH) rallied 48.7% in 2025, according to data from S&P Global Market Intelligence .

The SMH is an exchange-traded fund that provides investors with a means to diversify their investments across the semiconductor sector.

Typically, the diversity of ETFs results in average returns compared to highly concentrated portfolios. However, the semiconductor sector is no ordinary sector of the economy, and artificial intelligence has only made it more important, as evidence by last year's gains.

Semiconductors rally... again

What's remarkable about last year's outsize gains for the SMH is that Nvidia (NASDAQ: NVDA), the largest component at just over 20% of the ETF, actually underperformed the overall ETF, with a full-year gain of "just" 38.9%. Additionally, the SMH actually caps its market cap weighting at 20% during every rebalancing, so it's likely that the ETF sold a fair amount of Nvidia stock during the year in order to maintain this 20% allocation.

The biggest contributor to the ETF's outperformance was likely Micron (NASDAQ: MU), which surged 240.2%, including dividends, to become the ETF's fourth-largest holding. Micron is one of only three major DRAM memory manufacturers and one of five major NAND flash storage manufacturers outside of China. Memory is somewhat commodity-like, and prices are known to be incredibly volatile. Last year, the artificial intelligence buildout reached a level that spurred a huge acceleration in demand for DRAM and NAND, leading to price spikes unlike anything the industry has seen before.

The memory price increases are expected to continue into 2026, with DRAM projected to see a price increase of 50% or more this quarter alone. Meanwhile, NAND flash prices are expected to rise 30% to 40% quarter-over-quarter. Major new supply isn't expected to come online until the 2028 time-frame.

Rounding out the second, third, and fifth-largest stocks in the ETF were Taiwan Semiconductor Manufacturing (NYSE: TSM), Broadcom (NASDAQ: AVGO), and Advanced Micro Devices (NASDAQ: AMD), which rallied 55.9%, 50.7%, and 77.3%, respectively.

TSMC, obviously, currently holds the dominant position in manufacturing all leading-edge chips, whether they are designed by Nvidia, Broadcom, or AMD. The latter two names were also big beneficiaries of the AI boom, with AMD aiming to become a strong second source of AI GPUs behind Nvidia, and Broadcom providing the necessary IP to enable third parties to design their own AI ASICs (application-specific integrated chip), such as Alphabet's custom Tensor Processing Unit that powers its highly competitive Gemini models.

Can the chips continue to eat the world?

The common thread across all of these winners is that they are all beneficiaries of the AI infrastructure boom, which appears to show no signs of slowing down. Earnings continue to surge, seemingly justifying the sky-high multiples at which most of these winners trade.

The big question is whether the earnings boom can continue for multiple years, which these stocks now appear to be pricing in.

There are some valid concerns around how much of the industry appears to be tied to the fate of OpenAI and its vast spending plans. OpenAI CEO Sam Altman noted back in November that he expects OpenAI to end the year with $20 billion in annualized recurring revenue (ARR) in 2025, but the still-private company is also racking up losses, and is expected to have burned tens of billions of dollars last year. Over the next eight years, OpenAI has already committed to a massive $1.4 trillion in spending.

Those commitments are fueling much of these companies' future guidance, so if anything were to happen to OpenAI – a loss of competitiveness or a drying up of outside funding amid an economic downturn – that could pose a significant risk. The second, bigger risk is if the scaling of generative AI models hits a wall of progress. That could also upend the AI boom.

However, as things stand today, most industry leaders predict AI progress will continue scale, will be transformative to the economy, and that the spending boom will continue for at least the next few years. As such, it wouldn't be surprising if the SMH outperforms again in 2026.

Billy Duberstein and/or his clients may have positions in Alphabet, Broadcom, Micron Technology, and Taiwan Semiconductor Manufacturing and has the following options: short January 2027 $195 calls on Micron Technology. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.