In the past decade, we have seen “the king of all bull markets” in Wall Street. The run was the longest ever. Though Wall Street’s record bull run ended on Mar 12, 2020 on COVID-induced selloffs, markets again shrugged off all worries and are hovering around all-time high levels.

The ebbing pandemic, a less-hawkish Fed in 2023, the artificial intelligence (AI) boom, earnings recovery and resilient American consumers have been propelling the Wall Street. Earnings growth for the S&P 500 index, which was negative for each of the preceding three quarters, turned positive in the third quarter of 2023.

Notably, SPDR S&P 500 ETF (SPY Quick QuoteSPY - Free Report) gained about 205% during the past 10 years, SPDR Dow Jones Industrial Average ETF (DIA Quick QuoteDIA - Free Report) advanced 182.6% and the tech-heavy Invesco QQQ Trust (QQQ Quick QuoteQQQ - Free Report) added 393% (as of Dec 6, 2023).

Against this backdrop, we would like to note that semiconductor ETFs emerged as the best ETFs of the past decade. VanEck Semiconductor ETF (SMH Quick QuoteSMH - Free Report) added about 677%. Invesco Semiconductors ETF (PSI Quick QuotePSI - Free Report) jumped 616% and SPDR S&P Semiconductor ETF (XSD Quick QuoteXSD - Free Report) soared 585% in the past decade.

Inside the Recent Surge in Semiconductor ETFs

There are now signs of the Federal Reserve's aggressive interest rate hiking campaign nearing an end. And the demand for artificial intelligence (AI) applications is extremely high. As a result, several chip ETFs have been hovering around a lofty level. A significant portion of the S&P 500's 2023 gains can be attributed to the strong performance of a group of large-cap stocks, referred to as the "Magnificent Seven." And chip giant Nvidia (NVDA Quick QuoteNVDA - Free Report) is a part of "Magnificent Seven."

Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life, from cars, electronic gadgets to planes and weapons. The demand will continue to trend higher given the increased digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail, among others.

The rapid adoption of cutting-edge technology like cloud, Internet of Things, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, 5G and other advanced information technologies, as well as the solar power industry, should continue to fuel growth.

The CHIPS-Plus bill, dubbed the Chips and Science Act, in the United States is another plus. The bill would provide $54 billion in grants for semiconductor manufacturing and research, tens of billions to support regional technology hubs and a tax credit covering 25% of investments in semiconductor manufacturing through 2026. As such, it will encourage investment in chip manufacturing and spur the innovation and development of other U.S. technologies.

Maybe PC sales are not up to the mark and there is saturation in smartphone demand in the developed market, but that is not likely to hold back the demand for semiconductors. The smartphone market is expected to grow again in the coming days after some downbeat years. Greater rollout and availability of 5G models and the promotion of 5G service packages globally should boost smartphone demand. Further, the semiconductor space has also been witnessing mergers and acquisitions, providing a boost to stock prices.

In any case, semiconductor is the value-centric traditional tech area, which is likely to have an upper hand in an edgy investing backdrop. Excessively higher demand from the automotive sector is also acting as a tailwind for the semiconductor space. However, semiconductors for mobile devices have their own set of challenges. They have to be priced lower. Global growth worries are negatives for the space.