Why Buy One, When You Can Buy Them All With the SMH?

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We found something absolutely fascinating…

Searches for the semiconductor ETFs land in second and third amongst financial pros seeking technology ETFs.

That means financial pros care about a very specific part of the technology sector more often than all the other broad technology ETFs save one.

The semiconductor industry is expected to reach $1 trillion by the end of the decade, according to analysts at McKinsey & Company. 

It’s so essential to our economy that the senate recently passed a bill to subsidize U.S.-made semiconductor chips.

Coming out of the pandemic, we learned just how fragile this boom and bust industry was.

The bill will give upwards of $50 billion to domestic companies for semiconductor manufacturing, production, research, and development. One of the easiest ways investors gain exposure to the semiconductor industry is through ETFs. And one of the most compelling choices is the VanEck Semiconductor ETF (SMH).

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Check out our analysis below…

VanEck Semiconductor ETF (SMH) is designed to measure the performance of the MVIS US Listed Semiconductor 25 Index, which consists of 25 of the largest and most liquid stocks involved in semiconductor production and equipment. 

The average market cap of the companies in SMH is $152.4 billion. 

• Price-to-earnings ratio of 20.40x
• Price-to-book ratio 5.29x
• 99.5% of the stocks have a market cap larger than $5 billion
• The top five holdings make up 35% of the ETFs weighting

Here are the top five holdings in SMH and their weighting:

As we noted earlier, the SMH is a concentrated ETF, and not one an investor should seek if they want diversification. However, if their goal is to gain exposure to the semiconductor space, then it doesn’t get much easier than SMH.

If you invested $10K in SMH 10 years ago, it would be worth around $75K. And that’s after a significant sell-off in semiconductors over the last year. 

Regarding relative performance, SMH lags behind the QQQ and SPY this year. However, as you can see from the chart above, taking on that additional risk has paid off in the past. 

Trading SMH

SMH is an actively traded ETF. On average, you can expect to see around 5.5 million shares trade. If you’re an options trader, you’ll be glad to hear that SMH has weekly, monthly, and LEAPS options available to trade. 

Investing In SMH

One thing people often forget to look at when researching ETFs is the expense ratio. A high expense ratio can eat away at your potential gains. A good rule of thumb is to avoid ETFs with an expense ratio above 1%. SMH has an expense ratio of 0.35%.

Dividends also play a factor in some investors’ decision-making. Adding a stream of income via a dividend is always an attractive benefit. SMH pays its shareholders an annual dividend of $1.57 per share. 

Competition Is Stiff

There are several other semiconductor ETFs out there.

iShares Semiconductor ETF (SOXX): The largest semiconductor ETF, 0.43% expense ratio, $10K invested ten years ago now worth $84K, 35 positions in its holdings. $3.69 annual dividend. 

Invesco Dynamic Semiconductors ETF (PSI): passively-managed ETF, comprised of 30 stocks, charges an expense ratio of 0.56%. A $10K investment ten years ago now is worth $76K. $0.36 annual dividend. 

And while these two other ETFs are similar in performance and holdings. The portfolios are all weighted differently. Which offers a potential edge to any savvy investor who follows the space closely. 

Our Opinion 8/10

McKinsey & Company believes the semiconductor industry will be worth $1 trillion by the decade’s end. Chip demand is expected to remain strong for years to come. Trying to figure out which chip maker will emerge as the king is difficult. And SMH offers a way for investors to gain exposure easily. 

And while the sector is down, we believe now is a buying opportunity. That’s why we like SMH over the next 12-24 months.