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There’s a good reason Warren Buffett likes Vanguard funds. Vanguard, led by the (late) Jack Bogle, pioneered and popularized index fund investing. Vanguard’s funds are known for their low costs.

Those low expense ratios wouldn’t mean much, though, if Vanguard’s funds didn’t perform well. The good news is that many of them do. Vanguard’s best exchange-traded fund (ETF) is up 24% this year. But there’s another ETF that’s up twice as much.

Vanguard’s best beat

Vanguard offers 86 ETFs. One has outperformed all others in 2024: The Vanguard S&P 500 Growth Index Fund ETF (VOOG -0.87%)This ETF is up 24% this year, following an impressive 28% gain in 2023.

Most investors would probably be happy with these returns. However, those who want to make even bigger profits should look at the VanEck Semiconductor ETF (Do you like to sleep?) 0.71%)This ETF is up a whopping 48% since the beginning of the year.

The VanEck Semiconductor ETF is managed by global investment manager VanEck. This ETF seeks to replicate the performance of the MVIS US Listed Semiconductor 25 Index. As its name suggests, this index includes companies engaged in semiconductor manufacturing and equipment that are traded on US exchanges.

This year’s high returns are no coincidence for the VanEck Semiconductor ETF. It has averaged 38.6% annual returns over the past five years. Since the fund’s inception in December 2011, its average annual return is 26.5%. By comparison, the Vanguard S&P Growth Index Fund ETF is up 16.6% over the past five years and 15.7% since its inception in September 2010.

Why the VanEck Semiconductor ETF is rising so much

You can probably guess why the VanEck Semiconductor ETF is doing so well this year. Chip stocks are hot, thanks largely to rising demand for servers used to train and deploy artificial intelligence (AI) systems.

This VanEck ETF owns just 26 stocks. The top five holdings make up over 50% of its total portfolio. When those stocks rise, so does the price of the ETF. And they’ve risen significantly so far in 2024.

The fund’s largest investment is NVIDIAwhich represents 20.4% of its total assets. Nvidia’s stock price is up 150% this year. Customers can’t get enough of the company’s graphics processing units (GPUs), which are the gold standard in supporting AI models.

A further 12.9% of the VanEck Semiconductor ETF is invested in Semiconductor manufacturing in TaiwanThe company makes chips designed by leading customers such as Nvidia, and its shares have risen 65% since the beginning of the year.

About 7.7% of the fund portfolio is in BroadcomThe company recently announced a 1:10 stock split. Its shares have risen more than 40% through 2024.

The fourth and fifth largest positions of the VanEck ETF are modern micro devices And ASML Holding with 4.97% and 4.8% of the fund’s net assets respectively. Advanced Micro Devices is one of Nvidia’s biggest competitors. Its stock has only risen by around 8% this year. Shares of semiconductor manufacturing equipment manufacturer ASML, on the other hand, have risen by over 35%.

Should you buy this high-flying ETF?

Risk-averse investors should probably stay away from the VanEck Semiconductor ETF. When it falls, it falls hard. In the second quarter of 2022, for example, the ETF plunged 24%. The fund also trades at a premium because the price-to-earnings ratio of the stocks in its portfolio is above 39.

However, aggressive investors who want to own a basket of semiconductor stocks should consider buying the ETF. AI should continue to provide strong tailwinds for these stocks. The VanEck ETF’s annual expense ratio is 0.35%, higher than Vanguard’s top ETF this year, but still not too expensive. Also Morning Star gives the VanEck Semiconductor ETF a five-star rating (the highest possible).

As far as I know, Buffett has never recommended VanEck because he has Vanguard. He doesn’t own any VanEck ETFs. But given the merits of the VanEck Semiconductor ETF, maybe he should.