History Says This Chip ETF Keeps Beating the S&P 500. It Has Trailed the Index Only Twice Since 2016.

The VanEck Semiconductor ETF (NASDAQ:SMH) is having another big year. As of this writing, the chip-focused fund has generated a total return of about 59% in 2026. The S&P 500 (SNPINDEX:^GSPC), with dividends included, has gained about 12%.

And a difference like that is nothing new. Measured on total return, the fund beat the index in eight of the 10 calendar years from 2016 through 2025. In its eight winning years, it never won by less than about 13 percentage points.

A record like that can make the fund look like a simple upgrade over an S&P 500 index fund. But I don't think it is that simple. The two years the fund lost (and how badly it lost them) say as much about owning it as the eight years it won.

Image source: Getty Images.

Eight wins in 10 years

The winning years were rarely close. The stretch began with a win in 2016, about 36% to the index's 12%. The fund returned about 65% in 2019 against the index's 31%, and about 73% in 2023, its best year of the decade, against 26%. Last year it won again, gaining about 49% to the index's 18%. Zoom out, and the fund's total return from the end of 2015 through 2025 amounts to nearly 1,400% -- enough to turn $1,000 into almost $15,000. The same $1,000 in an S&P 500 index fund rose to about $4,000.

Put another way, even after absorbing both losing years, an investor in the fund ended the decade with nearly four times as much money as one in the index fund.

This year is on pace to be a ninth win. Even so, owning the fund in 2026 has not been comfortable. Shares trade around $573 as of this writing, about 15% below the 52-week high of $671.83 they reached in June.

Two losing years, twice as deep

The exceptions were 2018 and 2022. In 2018, the fund's total return was about negative 9%, while the index lost about 5%.

And 2022 cut far deeper. The fund lost about a third of its value that year, while the index fell about 18%.

Both times, the fund's loss ran about double the market's. Chip demand is cyclical, and when the industry turns down, as it did in 2018, or when investors sell growth stocks broadly, as they did in 2022, a fund that holds only chip companies falls with the whole group.

Notably, the fund's two best years of the decade, 2019 and 2023, came directly after its two losing years. An investor who sold at the end of 2022 locked in the decade's worst year and missed out on its best one.

The record paid in full only for investors who stayed invested through both losses.

One stock, nearly a quarter of the fund

The record comes from a small portfolio. The fund, which has about $72 billion in assets, tracks an index of about 25 of the largest semiconductor companies listed in the U.S., and it charges 0.35% a year in fees ($35 per $10,000 invested).

The fund is also concentrated at the top: Nvidia (NASDAQ:NVDA), whose graphics processing units (GPUs) power much of the artificial intelligence (AI) build-out, accounted for about 23% of assets as of Sept. 16 -- a position worth about $16 billion. Taiwan Semiconductor Manufacturing represented about another 10%, and the five largest holdings combined were about half the fund.

All this adds up to a concentrated bet on one industry's cycle, with nearly a quarter of the fund riding on Nvidia alone at last count. When semiconductors lead the market, as they have for most of the last decade, that structure is arguably precisely what an investor wants. Of course, when the cycle turns, it's also the reason a down year can run twice as deep.

Sure, AI spending could keep chip demand growing for years to come. But the industry has never grown in a straight line, and another losing year may come with little warning.

Is the fund still worth buying? I think so. But I'd buy it alongside a broad S&P 500 index fund, not in place of one, and I'd size the position so a repeat of 2022, a loss of about a third, would not tempt me to sell.

The record is impressive. I just wouldn't count on the next decade of it arriving smoothly.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia and Taiwan Semiconductor Manufacturing. The Motley Fool has a disclosure policy.