Should You Buy the iShares Semiconductor ETF After Its 25% Plunge? The Answer Might Surprise You.

The iShares Semiconductor ETF (SOXX) is an exchange-traded fund focusing on American companies that design, manufacture, and distribute chips and components, with a particular emphasis on those powering the artificial intelligence (AI) revolution. The ETF has experienced a 25% decline since its peak in June on worries about the sustainability of the AI data center spending boom; however, it has still generated a 63% year-to-date gain and consistently outperformed the market since its inception in 2001.

The ETF is comprised of 30 American semiconductor stocks, with its five largest holdings accounting for 40.5% of the portfolio's value. AMD and Nvidia are prominent providers of graphics processing units (GPUs) for data centers, essential for AI training and inference workloads. Broadcom competes by offering custom AI accelerators, while Micron Technology is a top supplier of high-bandwidth memory (HBM) that enhances data flow alongside GPUs.

These companies have faced high demand for their chips and components, allowing them to dictate prices and boost profit margins. Consequently, they have delivered impressive returns for shareholders since the AI boom began in early 2023. Prior to this, the ETF benefited from other technological advancements, including the rise of smartphones and the adoption of enterprise software and cloud computing, achieving a 14.7% compound annual return since its establishment.

Forecasts for the AI boom remain optimistic, with major companies expected to invest billions in data center infrastructure. However, uncertainties persist, as some companies, such as Anthropic, have reported slower-than-expected revenue growth. Additionally, AI data center company Firmus recently canceled its IPO due to weak investor demand, while data center operators have faced rising borrowing costs, potentially hindering their ability to raise funds for further infrastructure development and chip purchases.

This scenario poses a significant challenge for the semiconductor industry, as increased production capacity could put downward pressure on prices, while weak demand may further exacerbate low profit margins. AMD CEO Lisa Su has indicated that the company intends to increase supply in 2027, while Micron, SK Hynix, and Samsung are constructing new memory production facilities in the U.S. The combination of these factors suggests unfavorable conditions for the iShares Semiconductor ETF in the near term.

Despite these concerns, the ETF could be an excellent long-term investment for those willing to hold it for five to 10 years. However, it might be prudent to wait and observe the situation before making a decision.