Why semiconductors could be the most efficient artificial intelligence play

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Investing in semiconductors may be the most efficient way to play the artificial intelligence boom, according to VanEck’s CEO.

“Semiconductors have become the heart of the AI trade,” Jan van Eck told CNBC’s “ETF Edge” this week.

His firm’s VanEck Semiconductor ETF (SMH), which tracks 25 of the biggest chipmakers in the country, is up 21% this year as of Wednesday’s close. However, SMH has fallen nearly 6% this month, led to the downside by Intel, AMD and On Semiconductor.

The fund’s top holding, Nvidia, has seen its shares surge nearly 70% this year amid soaring demand for its AI processors, but it’s also down 7% since the start of the month.

Van Eck suggests the weakness is temporary. He contends high interest in AI chips could set up the group for more durable returns.

“They have become revalued from being a highly cyclical business with short product lives to part of the growth trade, and they have more recurring revenue, so they can just stay at high profitabilities even despite some of the short-term stuff,” said van Eck.

ETF Action founding partner Mike Akins also sees opportunities for investors. He thinks limited competition for some of the top chipmakers’ products could sustain the group.

“You have a high moat, and they control that pricing point,” he said in the same interview. “Until there’s a situation where competition increases meaningfully in this space, where you can have some pricing pressure, it’s hard to see that trade going away.”

Still, Akins advises investors to pay attention to semiconductor fund flows as a barometer for future performance.

“We often caution our clients to almost think about flows as a contrarian indicator. As flows get really depressed, that’s potentially opportunity to buy, and vice versa. As flows get really extended, it might be time to pare a little bit.”

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