SMH vs. SMHX: Is VanEck's New Semiconductor ETF a Buy?

The semiconductor industry is poised for transformation, with global sales projected to reach $588 billion, marking double-digit growth from 2023 levels. While the semiconductor group is notoriously cyclical, the booming demand is particularly evident in Nvidia's (NVDA) explosive growth story, as the once-lowly maker of graphics chips for gaming has exploded into a dominant global force in artificial intelligence (AI) data center computing. 

In fact, Nvidia CEO Jensen Huang recently described demand for his company's latest AI chip as “insane," after declaring earlier this year that "Accelerated computing and generative AI have hit the tipping point. Demand is surging worldwide across companies, industries and nations."

While the fan-favorite VanEck Semiconductor ETF (SMH) has long served as the go-to vehicle for investors seeking broad semiconductor exposure through a single exchange-traded fund (ETF), the landscape continues to evolve to meet the market. In August 2024, VanEck introduced a fresh player to the scene: the VanEck Fabless Semiconductor ETF (SMHX). This new offering aims to capitalize on a specific niche within the semiconductor space, focusing exclusively on fabless semiconductor companies. 

With two distinct approaches to semiconductor investing now available through VanEck's offerings, which one better serves investors' needs? Let's examine how these ETFs compare.

VanEck Semiconductor ETF

The VanEck Semiconductor ETF (SMH), launched in 2011, stands as a cornerstone investment vehicle in the semiconductor space. The ETF's investment strategy is methodically structured to replicate the performance of the MVIS US Listed Semiconductor 25 Index, focusing exclusively on companies that generate at least 50% of their revenue from semiconductors or semiconductor equipment. 

This approach ensures pure-play exposure to the semiconductor industry, while maintaining a balance between chip manufacturers, designers, and equipment providers. The fund employs a market-cap-weighted methodology, rebalancing quarterly to maintain optimal sector representation and liquidity standards. At the heart of SMH's success lies its market-cap-weighted approach, which concentrates on the most liquid U.S.-listed semiconductor companies. 

SMH's strategy has proven particularly effective in capturing the industry's growth, with a 44.6% year-to-date gain. 

The fund's substantial assets under management (AUM) of $24.98 billion and robust average daily trading volume of 5.5 million shares provide investors with both stability and liquidity. This strong market presence is complemented by a competitive expense ratio of 0.35%, and a modest dividend yield of 0.42%, with distributions made annually.

The ETF's top 10 holdings account for 73.5% of total assets, reflecting a concentrated approach. Nvidia (NVDA) leads the portfolio with a 22.39% allocation, followed by foundry giant Taiwan Semiconductor (TSM) at 13.72%, and Broadcom (AVGO) at 7.81%. Other top holdings include Advanced Micro Devices (AMD) (4.78%), Qualcomm (QCOM) (4.22%), Micron Technology (MU) (4.09%), Applied Materials (AMAT) (4.15%), ASML Holding (ASML) (4.15%), Texas Instruments (TXN) (4.21%), and Analog Devices (ADI) (3.96%). This concentration in industry leaders, particularly outperforming Nvidia, has been instrumental in the fund's ability to capture the semiconductor industry's growth potential.

VanEck Fabless Semiconductor ETF

The VanEck Fabless Semiconductor ETF (SMHX) investment approach focuses exclusively on fabless semiconductor companies – firms that design, develop, and market chips, while outsourcing their actual manufacturing to third-party foundries, like Taiwan Semiconductor. This business model, which emerged in the 1980s, allows companies to concentrate their resources on innovation and design, while avoiding the massive capital expenditure required for manufacturing facilities. 

SMHX tracks the MarketVector US Listed Fabless Semiconductor Index, offering a more targeted approach compared to SMH's comprehensive industry coverage. This model requires companies to generate at least 50% of their revenue from fabless semiconductor operations. 

The ETF employs a modified market-cap-weighted methodology, rebalancing quarterly to maintain optimal representation of the fabless semiconductor segment while ensuring adequate liquidity. This focused approach contrasts with SMH's broader strategy of tracking the entire semiconductor value chain, from design to manufacturing and equipment makers.

Following in the footsteps of its successful counterpart, SMH, SMHX has demonstrated promising momentum, up about 9% since the start of October.

While SMH is an established industry heavyweight, SMHX is still building its presence, with $9.43 million in AUM and an average daily trading volume of around 27,000. SMHX currently offers no dividend distributions, but offers the same competitive expense ratio of 0.35% as its more established peer, providing investors with equal cost efficiency despite their different focus areas.

The ETF maintains a concentrated portfolio structure, similar to its older sibling, with its top 10 holdings representing 73.92% of total assets. While both funds feature Nvidia as their top holding, SMHX has a 21.87% allocation. 

The remaining holdings further reflect SMHX's fabless focus, with Broadcom (AVGO) at 14.78% and Astera Labs (ALAB) at 6.67%. Other key positions include Advanced Micro Devices (AMD) (4.66%), Synopsys (SNPS) (4.68%), Qualcomm (QCOM) (4.59%), Marvell Technology (MRVL) (4.49%), Arm Holdings (ARM) (4.12%), Monolithic Power Systems (MPWR) (4.10%), and Cadence Design Systems (CDNS) (3.90%). While sharing some holdings with SMH, SMHX's portfolio notably includes pure-play design companies that are absent from its broader counterpart.

The ETF's launch, along with its early success, reflects growing investor recognition of the fabless model's advantages. 

Conclusion

While SMH offers broad exposure to the entire semiconductor ecosystem with a proven track record and dividend payments, SMHX provides a narrow focus on fabless semiconductor companies. The newer ETF's concentration on design-centric firms might appeal to investors betting specifically on innovation and intellectual property in the chip industry, though it's worth pointing out that both funds share the same Nvidia-heavy skew - which means investors looking to buffer against single-stock risk in the semiconductor space may want to eye an equal-weighted fund, instead.