Why It’s Essential to Review Chip ETF Holdings: The Impact of Performance Gaps

This big performance gap shows why you should check chip ETF holdings

The Semiconductor ETF Showdown: VanEck vs. iShares – What You Need to Know

Greetings, Extreme Investor Network community! Today, we dive deep into the intriguing performance disparities between two powerhouse exchange-traded funds (ETFs) that track the U.S. semiconductor industry: the VanEck Semiconductor ETF (SMH) and the iShares Semiconductor ETF (SOXX). With an eye-popping gap of over 26 percentage points in performance, it’s a tale you won’t want to overlook.

A Rollercoaster Year for Semiconductors

So far, 2024 has proven to be a banner year for some semiconductor stocks, but not all ETFs are sharing in that bounty equally. The VanEck SMH fund has enjoyed a stellar 42% gain, while the iShares SOXX has limped along with a modest 15%. This divergence marks the largest performance gap we’ve seen in over a decade. Why, you might ask? Let’s break it down.

The Nvidia Factor

At the heart of this performance discrepancy is none other than Nvidia, the titan of the semiconductor space. According to Roxanna Islam, head of sector and industry research at VettaFi, the difference in ETF performance can be traced back to how each fund is weighted in terms of its biggest holdings.

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Nvidia is not just another stock; it has catapulted over 175% this year, becoming a significant driver of returns. In the VanEck SMH, Nvidia makes up nearly 20% of the portfolio. In stark contrast, the iShares SOXX allocates less than 8% of its assets to Nvidia. This means that the VanEck fund is far more susceptible to the gains (or losses) associated with Nvidia’s stock price. For many investors, this aggressive weighting strategy has translated into substantial rewards.

Fund Composition: More Than Just a Name

Let’s look closer at what differentiates these two funds:

  • Holdings: The VanEck SMH ETF consists of 25 of the largest U.S. semiconductor stocks, while the iShares SOXX fund includes 30. However, what’s intriguing here is that while SOXX has more holdings, SMH places a larger emphasis on its top performers.

  • Liquidity and Size: The VanEck ETF boasts a larger size and greater liquidity, making it an attractive option for active traders and institutional investors alike.

  • Diversification versus Concentration: SOXX’s structure, with its greater number of holdings, offers potentially more diversified exposure to the sector. While some investors prefer the concentrated play that SMH offers, it does come with elevated risk.

  • Age Matters: Established around a decade earlier, the iShares SOXX ETF has the advantage of being a first-mover in this space, allowing it to build a loyal following.
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Looking Ahead: What Should Investors Do?

As savvy investors, the next question on your mind might be: "What’s the best way forward?" While 2024 has clearly favored the VanEck SMH, experts like Islam don’t foresee this level of divergence continuing into 2025. She notes that while high concentrations in a few stocks can lead to outsized gains, it also increases volatility.

Consider this: A correction in Nvidia’s stock could significantly impact the VanEck SMH, putting its investors at risk. On the other hand, SOXX may offer stability as it spreads risk across a broader array of stocks. Both funds have posted strong performances historically; they both chart within the top 5% of technology funds when assessed over the past decade.

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Final Thoughts

In the fast-paced world of semiconductor investing, it’s critical to remain well-informed and understand the nuances that differentiate investment opportunities. The VanEck and iShares ETFs both offer unique advantages and risks.

At Extreme Investor Network, we believe informed investing is empowered investing. As you tailor your portfolio to meet your investment goals, take a close look at both products. Ask yourself: do you want the potential for higher short-term gains with a top-heavy fund, or are you seeking stability with a diversified approach?

Whichever path you choose, stay engaged, do your research, and monitor market trends closely. Here’s to making smart, informed decisions in your investment journey!

Join the conversation in our community and stay updated as we navigate the ever-evolving world of investing together.