The AI Stock controls the S&P 500, but this dominant power is missing from the index.
One of the most popular ways to invest in stocks is Vanguard S&P 500 ETF (voo 0.00%)). The Vanguard Fund is popular for reasons. By closely tracking the S&P 500 and combining it with a low cost rate, it becomes the top index fund of the S&P 500.
Investors have been rewarded for their patient investments in index funds like Vanguard's in recent years. The S&P 500 has grown by around 70% in just 28 months since reaching the bottom of the bare market in October 2022. Much of that growth has been driven by large tech companies that have been closely linked to the widespread emergence of artificial intelligence (AI).
However, not all good AI strains are included in the S&P 500. This means that index investors may be missing out.
Many people know that the S&P 500 is made up of 500 large companies across the stock market. but S&P Global There are several criteria that exceed the size that exclude a large number of companies. Specifically, the S&P 500 requires companies to have US-headquarters and multiple assets, and to make profits on a GAAP basis over the most recent quarter and 12-month period.
As a result, the company Taiwan Semiconductor Manufacturing (TSM) 1.03%)) It is not included in the index. However, this fantastic AI Semiconductor Company is still trading at a high price, making it easy for investors to add to their portfolio along with the Vanguard S&P 500 ETF.
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The dominant force in artificial intelligence
Industry-leading Semiconductor Company nvidia (NVDA) 2.63%)) If you want to create a new graphics processing unit (GPU), there is no ability to actually generate the chip itself. In order to actually etch and package the silicon wafer, the manufacturing needs to be outsourced to another company with facilities and technology. That's where Taiwanese semiconductor manufacturing companies or TSMC comes in.
TSMC works with chip designers to print chips using facilities and, more importantly, their own processes. TSMC spends a lot of research and development to create new processes that allow transistors to move closer to silicon, increasing the power efficiency of each chip.
TSMC may work closely with customers to develop new processes for specific applications. For example, Nvidia's latest GPU, Blackwell platform, uses a custom process that increases the total number of transistors on the chip.
TSMC is one of three chip manufacturers capable of producing cutting-edge chips on a large scale. It also holds a commander position in the entire chip manufacturing market, with market share of over 60%. It is the only company with resources dedicated to Nvidia and other major customers. apple and Broadcom.
Importantly, the size of TSMC allows us to gain more capital to invest in research and development and maintain our technology lead. As a result, when producing cutting-edge chips for applications such as GPUs for AI data centers and system-on-chips for smartphones, you need to stay at the top of your chip designer list. This will further increase the available capacity and can be used to accommodate the largest customer.
Management says AI chips are just beginning to sell.
When TSMC announced its fourth quarter revenue in January, they shared a very rosy view of its future. Management forecasts AI-related sales growth to 40% per year over the next five years. This should help generate 20% overall combined annual revenue growth for the business over the same period.
The company spends a lot of money to drive its growth. The capital expenditure budget for 2025 was approximately $40 billion, up 35% year-on-year. TSMC has historically been very smart about capital expenditures and has made it less than potential growth. Still, investors should note that the semiconductor industry is very cyclical, and could be at considerable fictitious costs that allow them to focus on financial outcomes during a recession.
However, it is worth noting that TSMCs may benefit from growing demand for AI chips, regardless of who designs these chips due to their unique manufacturing capabilities and scale. So, while many large tech companies are working to stay away from their dependence on NVIDIA, they use TSMC to create custom silicon for their AI servers.
Therefore, TSMC offers less volatile options when it comes to investing in AI than individual chip designers. With a positive revenue estimate valuation of just 23x, it is an absolute bargain. TSMC is far from the only big company left out of the S&P 500, but is currently one of the most attractive large caps outside of the Index.
Vanguard S&P 500 ETF investors want to add semiconductor stock to their portfolio. TSMC's market capitalization is around $1 trillion, and at the time of this writing it is worth around 2% of the overall S&P 500. Therefore, investors can simply shift 2% of the index to Taiwan Semiconductor stock to ensure a fair share. Inventory profit.
Adam Levy holds roles for Apple and Taiwan Semiconductor Manufacturing. Motley Fool has and recommends Apple, Nvidia, Taiwan Semiconductor Manufacturing, and Vanguard S&P 500 ETF positions. Motley Fool recommends Broadcom. Motley Fools have a disclosure policy.
