Investors like long-term returns, but short-term investors cannot tolerate volatility. And the very anxiety of investors with a short-term mindset, especially those nearing retirement, can present great opportunities for investors with a long-term mindset.
The best-performing sectors of the market over the past decade offer such opportunities. Although many investors often shy away from this sector due to its extreme booms and busts, it has actually delivered superior long-term returns over the long term.
Don’t let fear mongers and naysayers get in your way. This sector continues to be a long-term winner.
Throw in the chips along with the chips.
The sector in question is the semiconductor sector. A look at the performance of a low-cost exchange traded fund (ETF) that tracks the chip sector: iShares Semiconductor ETF (NASDAQ:SOXX)We can clearly see how chip stocks as a whole have crushed the overall market over the past decade, outperforming even the general technology and software sectors.
The entire S&P 500 index is up 176% over the past decade, providing long-term shareholders with impressive returns that far outpace the rate of inflation. Of course, the technology sector is further energized by powerful innovations in cloud computing, e-commerce, smartphone applications, and now artificial intelligence (AI).
High-tech oriented Invesco QQQ Trust (NASDAQ:QQQ)is meant to closely mirror the Nasdaq 100, which has risen 408% in that time.Among the technology fields, the cloud software field has achieved extremely high growth. iShares Enhanced Technology Software Sector ETF (NYSEMKT: IGV) It's even higher at 413%.
But that pales in comparison to the semiconductor sector, which rose a whopping 742%. This equates to nearly twice his return for the entire technology sector over the past decade, and more than 4.2 times his return for the broader market.
Why so many people shy away from the chip sector
Given the sector's long-term outperformance, it may be surprising that so many investors are avoiding it. After all, Warren Buffett had never bought semiconductor stocks before he bought them. taiwan semiconductor manufacturing (NYSE:TSM) In the second half of 2022, due to geopolitical concerns, it was decided to sell everything within two quarters.
In general, many Buffett followers and value investors say that the chip sector is moving too fast and that the rapid changes in technology have made long-term competitive advantage somewhat difficult to identify. This means that they are either being compromised or are being compromised by competitors.
There is some truth to this.After all, how do you see Nvidia (NASDAQ:NVDA) Overtaken by foundry partner TSMC intel (NASDAQ:INTC), was considered the undisputed champion of the sector just a decade ago. Now, Intel is trying to survive and embark on an ambitious rebuild after suddenly falling far behind in a relatively short period of time.
But that's the benefit of buying ETFs. With ETFs, you're betting on the long-term growth of an industry with a diverse mix of winners and losers. In the end, the winners emerge with top class and vibrant results.
How did semiconductors achieve this?More than just AI
As you can see from the chart above, for the first six years or so of the past decade, the chip sector has basically been up just like the broader software sector, and only started doing a little better than the Nasdaq in 2020. It was around the second half of the year. The chips started to separate from the pack.
Yes, the tech sector began to grow in earnest during the pandemic as businesses ran to cloud computing to stay afloat and consumers bought new laptops and smartphones with stimulus checks for the stay-at-home economy. . This has benefited both software, the Internet, and semiconductors.
But separations began to occur in late 2020 and 2021, even before ChatGPT's shocking debut in late 2022. Why?
I believe this is due to investors' renewed focus on stock valuations as inflation and interest rates begin to recover from their lows. During this time, software is considered to be a more stable, “recurring” subscription business, and chip sales can fluctuate from year to year, so software valuations are based on chip stock valuations. tended to be much higher.
However, rising interest rates reduce the present value of earnings far in the future. As a result, the valuations of stocks with high multiples such as software tend to decline.
On the other hand, semiconductor stocks, especially at the time, tended to trade at lower valuations. In addition to leveraging technology for growth, many chip leaders also pay dividends and buy back stock. These shareholder returns will only add to the sector's long-term numbers.
And while semiconductors as a whole may not grow as quickly as, say, cloud software, they still hold a unique position in terms of long-term growth. While the sector can boom or bust in a single year, the sector as a whole is projected to grow at an annual rate of 11.6% from 2023 to 2030, according to DataHorizon Research. Masu.
Therefore, the lower hurdles to clear and starting from lower valuations may have been key factors in the sector's outperformance as interest rates normalized.
Not just Nvidia
Of course, many may scoff at the rise of this field as a solo effort by Nvidia. As a pioneer in graphics processing units (GPUs) needed for generative AI applications, Nvidia's stock price has risen over the past two years. And because AI is a technology that has the potential to transform society and humanity, Nvidia has become a symbol of success.
But in reality, Nvidia isn't the only company driving interests in this space. In fact, seven of the 10 best-performing S&P 500 stocks over the past decade are all in the semiconductor sector, including four of the top five stocks.
Manufacturing cutting-edge chips with billions of tiny transistors is difficult, and past cycles have allowed the chip sector to consolidate into a small number of great companies with these unique technology capabilities. I did. So perhaps it's no surprise that not just his company but a handful of stocks participating in the AI chip design and manufacturing ecosystem would benefit.
Although the chip sector may not achieve the same gains over the next decade as it did in the past decade due to its high starting valuation, our world is becoming more automated, intelligent, and connected. Looks like it's progressing. All of these are powered by semiconductors. That makes this ETF a must-have for ETF investors for over 10 years.
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Billy Duberstein works at Taiwan Semiconductor Manufacturing. His clients may own shares in the companies mentioned. The Motley Fool has positions in and recommends Nvidia, Taiwan Semiconductor Manufacturing, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Intel and recommends options for long January 2025 $45 calls on Intel and his short May 2024 $47 calls on Intel. The Motley Fool has a disclosure policy.
This ETF Shattered the Market and Even Shattered the Tech Sector: Don't Let Fearmongers Keep You Out was originally published by The Motley Fool
