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Investors love their long-term gains, but short-term investors can’t stand volatility. And that very fear on the part of shorter-term-minded investors, particularly people nearing retirement, can potentially offer huge opportunities for investors with a long-term mindset.

The best-performing sector in the market over the past 10 years offers such an opportunity. While many investors often stay away from this sector due to its extreme booms and busts, over the long term, it has actually provided superior long-term gains.

Don’t let the fearmongers and naysayers keep you out. The sector remains a long-term winner.

Throw your chips in with the chips

The sector in question is the semiconductor sector. Looking at the performance of one low-cost exchange-traded fund (ETF) tracking the chip sector, the iShares Semiconductor ETF (SOXX 0.49%), one can plainly see how chip stocks, in aggregate, have crushed the broader market, even outperforming the general technology and software sectors over the past 10 years.

The broader S&P 500 has appreciated 176% over the past decade, giving long-term shareholders a nice return well above the rate of inflation. Of course, with strong innovations in cloud computing, e-commerce, smartphone applications, and now artificial intelligence (AI), the technology sector has rallied much more.

The tech-heavy Invesco QQQ Trust (QQQ -0.02%), meant to closely reflect the Nasdaq 100, has appreciated 408% over that time. Within the tech sector, the super-high-growth cloud software sector has pushed the iShares Expanded Tech-Software Sector ETF (IGV 0.51%) an even higher 413%.

But that all pales in comparison to the semiconductor sector, which has rallied a whopping 742%! That’s nearly double the returns of the overall technology sector and over 4.2 times the return of the broader market over the past decade.

SOXX data by YCharts.

Why many shy away from the chip sector

In light of the semiconductor sector’s long-term outperformance, it may be surprising that many investors shy away from it. After all, Warren Buffett had never once bought a semiconductor stock until he purchased Taiwan Semiconductor Manufacturing (TSM -0.69%) in late 2022, only to sell it all within two quarters over geopolitical fears.

The refrain by many Buffett acolytes and value investors, in general, is that the chip sector moves too quickly, with fast-changing technology making long-term competitive advantages somewhat hard to identify or more breach-able by the competition.

There is some truth to this; after all, just look at how Nvidia (NVDA 0.90%) and foundry partner TSMC have overtaken Intel (INTC -0.52%), which used to be regarded as the sector’s undisputed champion a mere decade ago. Now, Intel has suddenly fallen far behind in a relatively short amount of time and is attempting an ambitious turnaround for its very survival.

But that’s the beauty of buying an ETF. With an ETF, you are betting on the industry’s long-term growth with a diversified mix of winners and losers. Eventually, the winners rise to a top-weighting, buoying result.

Young and investing? Don’t ignore the semis. Image source: Getty Images.

How have semiconductors done it? It’s more than just AI

As you can see in the chart above, the chip sector had basically appreciated in line with the broader software sector for the first six years or so of the past decade and only began to do a bit better than the Nasdaq around late 2020, when the chips started to separate from the pack.

Yes, the technology sector began to take off in earnest during the pandemic, as companies ran to cloud computing to keep their businesses going, and consumers purchased new laptops and smartphones with stimulus checks for the stay-at-home economy. That benefited software, the internet, and semiconductors alike.

However, late in 2020 and into 2021, separation began to happen — even before the thunderous debut of ChatGPT in late 2022. Why was that?

I think it was due to a renewed investor focus on stock valuations as inflation and interest rates began to pick up from rock-bottom levels. In that period, software valuations tended to be much higher than those of chip stocks, as software is thought to be more of a stable “recurring” subscription business, and chip sales can fluctuate year to year.

However, rising interest rates lower the present value of earnings far out in the future. That tends to depress the valuations of high-multiple stocks such as software.

On the other hand, semiconductor stocks tended to trade at lower valuations, especially back then. Many chip leaders are also dividend payers and share repurchasers on top of their tech-powered growth. Those shareholder returns only add to the sector’s long-term numbers.

And while semiconductors overall may not grow as fast as, say, cloud software, semiconductors are still holding their own in terms of long-term growth. While the sector may boom and bust in any single year, the overall sector is projected to grow at an 11.6% annualized growth rate over the 2023 to 2030 time period, according to DataHorizzon Research.

So, starting from a lower valuation with a lower hurdle to clear may have been a key factor behind the sector’s outperformance as interest rates normalized.

It’s not just Nvidia

Of course, many may scoff at the sector’s rise as the work of Nvidia alone. As the first-mover in graphics processing units (GPUs) needed for generative AI applications, Nvidia’s stock has taken off over the past two years. And with AI being a potentially transformative technology to society and humanity, Nvidia has become the poster child of success.

But it’s actually not just Nvidia driving the gains in the sector. In fact, seven of the 10 best-performing S&P 500 stocks over the past decade are all in the semiconductor sector, encompassing four of the top five.

Producing leading-edge chips with billions of tiny transistors is difficult, and past cycles have allowed the chip sector to consolidate into a handful of exceptional companies with these unique technological capabilities. As such, it’s perhaps no surprise that not one but a handful of stocks all participating in AI chip design and manufacturing ecosystem would reap the rewards.

While the chip sector may not achieve the gains in the next 10 years that it did over the past 10, owing to higher starting valuations, our world only appears to be getting more automated, intelligent, and connected. All of that is powered by semiconductors. And that still makes this ETF a must-have for any ETF investor with a time horizon beyond 10 years.