1 Unstoppable ETF I'm Buying Hand Over Fist During the Next Bear Market

Bear markets are tough on the nerves -- it is not easy watching your portfolio shrink day after day.

Thankfully, we're not in a bear market, but sooner or later we will be. Many experts say it may be sooner rather than later, considering they tend to come around every seven years or so.

It has only been four years since the last bear market in 2022. But given that the S&P 500 has an historically high valuation, as measured by the Shiller P/E ratio, which, at 40.89, is the highest it has been since the dot-com boom, a market downturn within the next year is not out of the question.

Image source: Getty Images.

But there is a bright spot in bear markets -- they are the best times to buy. As former Berkshire Hathaway CEO Warren Buffett wrote in the 1997 letter to shareholders: "Smile when you read a headline that says 'Investors lose as market falls.' Edit it in your mind to 'Disinvestors lose as market falls -- but investors gain.'"

Why? Because, as Buffett wrote in the 1998 shareholder letter: "Whether we're talking about socks or stocks, I like buying quality merchandise when it is marked down."

So, when the bear market comes, whether it's next month, next year, or three years from now, you should be like Buffett and buy. The exchange-traded fund (ETF) I'll be buying in the next bear market is the VanEck Semiconductor ETF (NASDAQ: SMH).

Loading up on chip stocks

A bear market is defined as a 20% (or more) drop in the market from its recent high. If the S&P 500 drops 20% from its Oct. 6 all-time high of 7,818, it would be down to around 6,200.

If that happens, it would serve as a reset for a lot of the stocks that have been driving the bull market -- namely, AI semiconductor stocks. These stocks will likely continue to drive the markets in the years ahead as AI expands and matures. So I would take the opportunity to buy them at a discount in the VanEck Semiconductor ETF.

The VanEck Semiconductor ETF is highly concentrated, tracking the MVIS US Listed Semiconductor 25 Index, which consists of the largest, most liquid semiconductor stocks. The top three holdings are Nvidia, Taiwan Semiconductor Manufacturing, and Advanced Micro Devices.

The ETF debuted in December 2011, and it has beaten all other major tech ETFs since then, as the chart shows, with an average annualized return of nearly 28%.

Data by YCharts.

The fund is highly concentrated in a very volatile sector, so you would certainly want to hold this as part of a diversified portfolio. You would also want ETFs that provide some downside protection in a bear market, as well as some core, broad holdings.

While the VanEck Semiconductor ETF is subject to extreme short-term swings, history has shown that it delivers strong long-term returns. And a bear market would be the perfect opportunity to add some shares to ride what will likely be the next phase of AI chip-fueled growth. But place a limit on how much you buy, because such an aggressive growth ETF should only represent a smaller chunk of the portfolio.

Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Berkshire Hathaway, Nvidia, Taiwan Semiconductor Manufacturing, and iShares Trust - iShares Semiconductor ETF. The Motley Fool has a disclosure policy.