This semiconductor ETF is headed for its best quarterly gain in a year. Here are the winners

Published Thu, Mar 28 20242:25 PM EDTUpdated Thu, Mar 28 20242:49 PM EDT

Semiconductor stocks are off to another hot start to the year. The VanEck Semiconductor ETF (SMH) is up 28.5% in the first three months of 2024. That puts the SMH on pace for its biggest quarterly gain since the first quarter of 2023, when it jumped 30%. Those gains come as demand for artificial intelligence technology shows no signs of slowing down. "Everybody's recognizing this is not just a quick little flurry for a couple of quarters," said Mahoney Asset Management President Ken Mahoney. "This could be a multiyear expansion by the time all the companies get the hardware they want, the chips that they need." A look at the winners AI poster child Nvidia led the pack in the first quarter, rallying 82% and building on last year's 239% gain, as investors continued pouring into AI bets. The surge boosted the SMH, with the chipmaker accounting for more than a fourth of its weighting. NVDA YTD mountain Stock performance this year Excitement around Nvidia and AI leaders lent a helping hand to Taiwan Semiconductor Manufacturing , the third-best performer and second-largest holding in the fund. The stock is up more than 30% to start 2024. The Taiwan-based semiconductor manufacturer boasts a laundry list of advanced AI chipmakers and technology giants, including Nvidia, Qualcomm , Apple and Advanced Micro Devices . In a recent note to clients, JPMorgan reiterated its overweight rating on the global chip stock, saying "all roads in AI semis lead" to it. Analysts also noted shares trade at a 30% discount to the PHLX Semiconductor Sector Index. The "focus of medium- to long-term investors should be on TSMC's continued growth in [high-performance computing], strong [gross margin] expansion, pole position in AI chips and reaffirmation of novel tech leadership vs. Intel, all of which should also support our constructive view on TSMC's outlook," JPMorgan analysts wrote. While Nvidia-led AI tailwinds may have catapulted the sector toward another winning quarter, it's far from the only theme driving the SMH's gains. Gabelli Funds portfolio manager and technology analyst Hendi Susanto points to expectations for a recovery in areas such as memory, personal computers and smartphones as a potential driver behind some of the period's winning stocks. Many investors are "frontloading" those bets even if a turnaround will not hit until 2025, he added. TSM YTD mountain Stock performance in 2024 This includes memory chipmaker Micron Technology , the second-best performer in the SMH. Shares have skyrocketed more than 39% to start 2024, helped by strong sales in high bandwidth memory necessary in AI infrastructure. Micron popped 14% earlier this month on a strong earnings beat driven by AI demand , which propelled the stock to its best day since 2011. Harvest Portfolio Management's Paul Meeks called Micron's announcement that its AI-related chips are basically booked through 2025 a bold move for a company he has covered since its public markets debut in the 1980s. "When you make that comment, you know if you don't deliver, your stock will go down," he said. Despite the first quarter's astounding run, some on Wall Street have raised the alarm on the rapid price appreciation in the sector, with UBS strategist Andrew Garthwaite cautioning that this price momentum flashes some warnings signals. At the same time, not every semiconductor has experienced the luck of the AI trade, with seven stocks in the index poised for a losing quarter. Intel has seen the biggest slump in the SMH, with shares down 13%. That is followed by Universal Display and STMicroelectronics , headed for losses exceeding 12%.