Artificial intelligence (AI) could be the most transformational technology in a generation. AI chatbots like OpenAI's ChatGPT can already answer complex questions and instantly generate computer-generated text, images, and even new software code on command. The technology will only improve over time, but development isn't cheap because it requires enormous data centers filled 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 during 2025. That will benefit Nvidia, but significant amounts of money will also flow to other chipmakers, chip designers, and suppliers of networking equipment.
Picking winners and losers won't be easy, but there's good news in that regard: Investors don't necessarily have to. The iShares Semiconductor ETF(NASDAQ: SOXX) is an exchange-traded fund (ETF) packed with almost every hardware stock involved in the AI revolution. It can do the picking for you and here's why it might be a great buy for 2025.
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An ideal ETF for the AI spending boom
It's common for ETFs to hold hundreds or even thousands of individual stocks, but since this one is highly specialized, it holds just 30 names. It exclusively invests in companies that design, manufacture, and distribute semiconductors, which makes it highly concentrated. Therefore, investors should only buy it as part of a diversified portfolio of other funds and individual stocks.
With that said, the iShares ETF can provide investors with all of the exposure they need to the hardware segment of the AI spending boom. Its top five positions account for 38.3% of the total value of its portfolio, and they include some of the biggest players in this space:
Stock
iShares ETF Portfolio Weighting
1. Broadcom
11.42%
2. Nvidia
7.83%
3. Advanced Micro Devices
7.11%
4. Qualcomm
6.11%
5. Texas Instruments
5.82%
Data source: iShares. Portfolio weightings are accurate as of Dec. 24, 2024, and are subject to change.
Broadcom makes AI accelerators (a type of chip) for hyperscale customers like Alphabet, which they use as an alternative to Nvidia's chips. Accelerators can be the cheaper option, and tech giants can customize them to suit their needs. Broadcom also makes networking equipment for data centers, including switches that regulate how fast information travels between chips and devices.
Nvidia still makes the best AI chips in the world. It recently launched its new Blackwell graphics processing units (GPUs) for data centers, which offer up to 30 times more performance than its original flagship H100 GPU. The Blackwell GB200 is likely to be the most sought-after AI chip next year, and the early sales estimates make Nvidia stock look cheap right now.
Advanced Micro Devices is trying to compete with Nvidia in the market for data center GPUs. It plans to start shipping a Blackwell competitor in the second half of 2025, and it will be called the MI350. But although AMD is chasing Nvidia in the data center business, it's already a leading supplier of AI chips for personal computers. This could be a big growth market in the future as more AI workloads shift from data centers to devices.
Outside of its top five positions, the iShares ETF holds other important chip stocks. They include Taiwan Semiconductor Manufacturing, which fabricates many of the AI chips designed by Nvidia and AMD, and Micron Technology, which supplies industry-leading memory and storage chips for AI workloads.
The iShares ETF can help investors beat the S&P 500
The iShares ETF has generated a compound annual return of 11.2% since it was established in 2001. That beats the average annual return of 8.5% in the S&P 500 over the same period.
However, the ETF soared by an average of 22.7% per year over the last decade thanks to new technologies like cloud computing, enterprise software, smartphones, and AI, which accelerated the demand for chips. The S&P returned just 13.7% annually over the same period.
It's unlikely the iShares ETF -- or any fund -- can grow at a compound annual rate of more than 20% in perpetuity. However, the chip sector might be in a golden age right now thanks to AI. Nvidia CEO Jensen Huang believes data center operators will spend $1 trillion to upgrade their infrastructure to meet demand from AI developers over the next few years. Therefore, the enormous spending forecast by Morgan Stanley for 2025 could grow even further in 2026, 2027, and beyond.
On the flip side, if AI software isn't as revolutionary as experts predict, tech giants could reduce their spending on chips and other hardware. In that scenario, many of the stocks in the iShares ETF could lose a significant amount of 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.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the 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: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
