3 Favourite Stocks in Canada’s Top ETFs

As the market landscape continues to evolve, investors are constantly seeking opportunities to capitalize on emerging trends and industry shifts. With the rise of ETFs gaining momentum, the investment opportunities have become increasingly diverse, with a plethora of options for investors to explore.

In light of this, now may be an opportune moment to take a close look at tech-ETF-themed stock picks. Many of Canada's top-performing ETFs have favoured the following names as their top picks in their holdings.

As the technology sector continues to drive innovation and disrupt traditional industries, these companies have positioned themselves as leaders in their respective domains. However, investors looking to can gain exposure to these transformative industries while diversifying their portfolios should remember past performance is not indicative of future results.

Chip giant Advanced Micro Devices (AMD) designs digital semiconductors for markets such as PCs, gaming consoles, data centres, industrial, and automotive applications. The company is a leader in markets for CPUs and GPUs, used in PCs and data centres. AMD also supplies the chips used in popular game consoles including the Sony PlayStation and Microsoft Xbox.

With deep expertise in digital semiconductor, AMD is strategically positioned to thrive amid favorable industry trends in data centers, artificial intelligence, and gaming. “We consider AMD to be one of two notable firms in graphics processing units, which are especially well suited for AI,” says a Morningstar equity report.

While the company may currently trail behind Nvidia in AI GPUs, its expertise in GPUs is poised to become increasingly valuable and profitable in the coming years, the report notes.

AMD’s primary products include processors and GPUs tailored to PCs, game consoles, and servers. While Apple’s ARM-based processors will likely gain share in the PC market, “we still expect x86-based chips from AMD and Intel to retain leadership in the Windows PC market for quite some time,” asserts Morningstar analyst Brian Colello, who pegs the stock’s fair value at US$140, and forecasts AMD to achieve a top-line compound annual growth rate of 17% through 2028.

With AMD's data centre GPU business poised to see a significant uptake in artificial intelligence applications, Colello projects a growth of 12% in 2024, followed by an average annual growth of 19% from 2025 through 2028.

Leading chipmaker Nvidia (NVDA) develops GPUs that have emerged as important semiconductors used in artificial intelligence.

Not only does Nvidia offer AI GPUs, but also a software platform, Cuda, used for AI model development and training. The firm is also expanding its data centre networking solutions, helping to tie GPUs together to handle complex workloads.

Nvidia's technology stands virtually unrivaled in the field of training AI. Particularly, the introduction of Nvidia's H100 data centre chip has contributed over US$1 trillion to the company's value, establishing it as a dominant force in the AI space.

“Nvidia has a wide economic moat, thanks to its market leadership in GPUs, hardware and software tools needed to enable the exponentially growing market around artificial intelligence,” says a Morningstar equity report.

The gaming market has traditionally been dominated by GPUs, with Nvidia's GPU graphics cards consistently regarded as top-tier. “More recently, cryptocurrency miners found the need for parallel processing GPUs, leading to a boom-and-bust cycle for Nvidia,” says Colello, who puts the stock’s fair value at US$910, underpinned by the chipmaker’s prospects in the data centre and AI GPUs.

Nvidia's data centre business has experienced remarkable growth, skyrocketing from US$3 billion in 2020 to US$15 billion in 2023, then topping US$47.5 billion in fiscal 2024. Colello forecasts further expansion to US$101 billion in fiscal 2025, driven by improved supply.

Taiwan Semiconductor Manufacturing Co. is the world's largest dedicated chip foundry, with almost 60% market share. As the world’s largest third-party chip manufacturer, TSMC’s impressive customer base includes Apple, AMD, and Nvidia.

TSMC (TSM) is poised for significant gains from the AI surge, serving as the primary producer of main processors for Apple iPhones, Qualcomm mobile chipsets, processors for AMD, and the leading manufacturer of AI chips for Nvidia, the market leader in GPUs used for AI applications.

“Organic growth of artificial intelligence, Internet of Things, and high-performance computing applications may last for decades,” says a Morningstar equity report, identifying AI as one of the key growth drivers for TSMC.

Another long-term growth factor for TSMC includes the consolidation of semiconductor firms, which will fuel “demand for integrated systems made with the most advanced nodes,” the report adds.

TSMC’s wide moat is underpinned by cost advantage and intangible assets, especially its long-standing leadership in node advancement. “Process technology leadership only enables TSMC to improve power, (faster) performance, and (smaller) area, or PPA, cost per chip and time to market,” notes Morningstar equity analyst Phelix Lee, who appraises the stock’s fair value to be US$151 ADR.

Not only are these factors critical for the competitiveness of computing devices, but they also justify higher prices than peers, adds Lee, who projects the company’s top-line CAGR at 13.5% over the next five years.