Semiconductor ETF Soared 50% Higher Than S&P 500 in 2025—Here's Why the Rally May Continue

The VanEck Semiconductor ETF (NASDAQ: SMH) just delivered a jaw-dropping 48.7% return in 2025, nearly tripling the S&P 500’s performance. While this kind of outperformance might seem like a one-off anomaly, it’s actually the result of a structural shift in how the chip industry operates—and there’s more upside ahead.

The Real MVP Wasn’t Who You’d Expect

Here’s the thing that caught everyone off guard: Nvidia, the 800-pound gorilla in the ETF at just over 20% of holdings, only gained 38.9%. Yet the overall fund still crushed it. Why? Because the ETF is capped at 20% per holding during rebalancing, forcing the fund to lock in gains and reallocate into other performers.

The real star was Micron Technology, which skyrocketed 240.2% to become the ETF’s fourth-largest position. As one of only three major DRAM manufacturers and a top NAND flash producer globally, Micron rode a wave of unprecedented demand. AI infrastructure buildout created memory shortages so severe that DRAM prices are projected to jump 50% or more this quarter alone, with NAND flash rising 30-40% quarter-over-quarter. Major new production capacity won’t hit until 2028, meaning these multiples of 50-plus growth rates could sustain for years.

TSMC, Broadcom, and AMD rounded out the winners with 55.9%, 50.7%, and 77.3% gains respectively. TSMC dominates leading-edge chip manufacturing for Nvidia, Broadcom, and AMD’s designs. Broadcom benefited from providing AI ASIC building blocks to companies like Alphabet for custom chips. AMD is positioning itself as Nvidia’s primary challenger in the GPU market.

The AI Spending Machine Keeps Humming

Every winner in this rally shares one thing: they’re all feeding the AI infrastructure boom. Earnings are surging, and multiples remain elevated because investors believe the growth thesis extends years into the future. OpenAI’s Sam Altman disclosed the company expects $20 billion in annualized recurring revenue for 2025, while the firm has already committed to $1.4 trillion in spending over the next eight years. That kind of capital deployment is trickling down to every level of the chip supply chain.

What Could Derail This?

Two risks loom. First, OpenAI itself—or the broader AI sector’s ability to generate returns on massive capex. If funding dries up or the company loses competitive edge in an economic downturn, the entire chain could contract. Second, if generative AI scaling hits a progress wall, all bets are off.

That said, industry consensus remains bullish. Most leaders expect AI innovation to accelerate, remain economically transformative, and drive spending for at least several more years. Translation: another year of semiconductor outperformance isn’t out of the question.