In the disruptive technology lexicon, whether it’s artificial intelligence, electric vehicles, healthcare innovation, video games, and much, much more, semiconductors are vital. Given the ubiquity and necessity of chips to power the technologies of tomorrow, investors looking for a more conservative approach to disruptive and thematic investing may want to opt for a tried-and-true standby with the VanEck Vectors Semiconductor ETF (SMH) .
The $6 billion SMH, which is almost 10 years old, is home to 25 stocks, and while that may seem like a concentrated lineup, it is more than adequately representative of the largest, most relevant semiconductor manufacturers. SMH’s roster offers investors enough depth to capitalize on a variety of end markets for chips.
“Semiconductors are essential technology enablers that power many of the cutting-edge digital devices in use today. They control the computers, and mobile devices we use to communicate, the cars and planes we rely on in order to travel, the machines that diagnose and treat illnesses, the military systems that protect us and the electronic gadgets we use to listen to music, watch movies, and play games, just to name a few,” according to a VanEck white paper.
Diversity Matters in the SMH ETF
While SMH isn’t home to a lot of stocks, the VanEck fund does cover a lot of bases. For example, Taiwan Semiconductor (NYSE: TSM), the fund’s largest holding at a weight of 13.58%, is the biggest chip foundry operator, meaning it plays an integral in bringing the designs of other SMH components to life and to market.
Additionally, SMH holdings such as Nvidia (NASDAQ: NVDA), Advanced Micro Devices (NASDAQ: AMD), and Qualcomm (NASDAQ: QCOM), just to name a few, have exposure to growing markets such as data centers, crypto mining, gaming, 5G, and smartphones. Communication and consumer electronics combine for 39% of chip demand, according to VanEck.
Adding to the allure of SMH for long-term investors is that many of its member firms have wide moats, meaning there are high barriers to entry in the semiconductor industry.
“Economic moats are sustainable competitive advantages that are expected to allow companies to fend off competition and sustain profitability into the future. Semiconductor companies can position themselves favorably, by creating and maintaining economic moats,” according to the VanEck research.
While the coronavirus pandemic led to a global chip shortfall that lingers today and is hindering multiple industries, semiconductor sales have been trending higher over the past year and the pandemic ushered in changes that could be long-term drivers of new chip demand.
“Strong demand for electronic devices, in part because of widespread remote working and homebased learning, coupled with the push towards digitization, have helped the chip industry strongly hold its ground against the ramifications of the pandemic, although this has led to a chip crunch,” concludes VanEck.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.