Artificial intelligence (AI) has the potential to be the most transformative technology in a generation. AI chatbots like OpenAI’s ChatGPT are already able to answer complex questions and instantly generate computer-generated text, images, and even new software code in response to commands. This technology will only improve over time, but it’s not cheap to develop, requiring huge data centers with specialized chips from suppliers like Nvidia.
Morgan Stanley predicts that Microsoft, Amazon, Alphabet, and Meta Platforms alone will spend a combined $300 billion on AI data center infrastructure and chips by 2025. This benefits Nvidia, but a large amount of the money goes to other chip manufacturers, chip designers, and network equipment suppliers.
Determining winners and losers is not easy, but there is good news in this regard. Investors don’t necessarily have to do that. iShares Semiconductor ETF (socks -0.85%) is an exchange-traded fund (ETF) packed with nearly every hardware stock involved in the AI revolution. Here’s why it might be the best purchase of 2025 because it does the shopping for you.
Image source: Getty Images.
Best ETFs for the AI spending boom
While ETFs typically hold hundreds or even thousands of individual stocks, this ETF is highly specialized and only holds 30 stocks. Our investments are concentrated because we invest exclusively in companies that design, manufacture, and sell semiconductors. Therefore, investors should only purchase them as part of a diversified portfolio of other funds or individual stocks.
That said, the iShares ETF can provide investors with all the exposure they need to the hardware segment of the AI spending boom. The top five positions account for 38.3% of the total portfolio value and include some of the largest companies in the sector.
stock
iShares ETF Portfolio Weighting
1.Broadcom
11.42%
2. Nvidia
7.83%
3. Advanced microdevices
7.11%
4. Qualcomm
6.11%
5. Texas Instruments
5.82%
Data source: iShares. Portfolio weightings are accurate as of December 24, 2024 and are subject to change.
Broadcom makes AI accelerators (a type of chip) for hyperscale customers like Alphabet, which they use as a replacement for Nvidia chips. Accelerators are a cheaper option, and tech giants can customize them to suit your needs. Broadcom also makes networking equipment for data centers, such as switches that control the speed at which information moves between chips and devices.
Nvidia still makes some of the best AI chips in the world. The company recently launched new Blackwell graphics processing units (GPUs) for data centers. It offers up to 30x more performance than the original flagship H100 GPU. The Blackwell GB200 is likely to be the most popular AI chip next year, and early sales forecasts make Nvidia stock look cheap at the moment.
Advanced Micro Devices is trying to compete with Nvidia in the data center GPU market. The company plans to begin shipping a competing product to Blackwell in the second half of 2025, which will be called MI350. But while AMD is chasing Nvidia in the data center business, it is already a major supplier of AI chips for personal computers. This could be a huge growth market in the future as AI workloads move from data centers to devices.
Beyond the top five, the iShares ETF also holds other important semiconductor stocks. These include Taiwan Semiconductor Manufacturing, which manufactures many of the AI chips designed by Nvidia and AMD, and Micron Technology, which supplies industry-leading memory and storage chips for AI workloads. Masu.
iShares ETF helps investors beat the S&P 500
The iShares ETF has generated a compound annual return of 11.2% since its inception in 2001. This beats the S&P 500’s average annual return of 8.5% over the same period.
But demand for chips has accelerated thanks to new technologies such as cloud computing, enterprise software, smartphones and AI, and the ETF has soared an average of 22.7% a year over the past decade. The S&P returned just 13.7% annually over the same period.
It is unlikely that the iShares ETF or any other fund will be able to grow at a compound annual rate of more than 20% forever. But thanks to AI, the chip sector may now be in a golden age. Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion on infrastructure upgrades to meet the demands of AI developers over the next few years. Therefore, Morgan Stanley’s huge spending forecast for 2025 is likely to increase further in 2026, 2027, and beyond.
Conversely, if the AI software turns out to be less innovative than experts predict, tech giants could cut back on spending on chips and other hardware. In that scenario, many of the iShares ETF’s shares could lose significant value.
That’s why, as I mentioned earlier, investors should only buy this ETF as part of a balanced portfolio of other funds or individual stocks.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Randi Zuckerberg is a former head of market development and spokesperson at Facebook, sister of Meta Platforms CEO Mark Zuckerberg, and a member of the Motley Fool’s board of directors. Suzanne Frey, an Alphabet executive, is a member of the Motley Fool’s board of directors. Anthony Di Pizio has no position in any stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Alphabet, Amazon, Meta Platforms, Microsoft, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, Texas Instruments, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom and recommends the following options: A long January 2026 $395 call on Microsoft and a short January 2026 $405 call on Microsoft. The Motley Fool has a disclosure policy.
