Every year, it seems there is one stock that surges above the rest, hitting headlines and causing discussions at dinner tables. And this year, that stock has been Nvidia (NASDAQ: NVDA). The semiconductor stock surged in share price, with demand increasing — especially on the back of artificial intelligence (AI) use. Yet, if you’re not one to sink all your cash in one growth stock, I get it.
That’s why today, we’re going to look at a semiconductor exchange-traded fund (ETF) instead. Let’s go over what investors should look for when considering a semiconductor ETF and the best option out there.
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What to look for
First off, investing in a semiconductor ETF can be a smart move given the growth potential of the semiconductor industry. But there are certainly some factors investors should look for to find the right semiconductor ETF.
Investors need to first consider the expense ratio. This is the annual fee charged by the ETF provider for managing the fund. Look for a low expense ratio to minimize costs and maximize your returns over time. From there, understand the index the ETF is tracking. Some ETFs may track broad semiconductor indices, while others may focus on specific segments within the semiconductor industry, such as equipment manufacturers or semiconductor manufacturers. Then, ensure that the ETF has sufficient trading volume and liquidity to allow you to buy and sell shares easily without significant price impact.
Next, get into the ETF itself. Check the holdings of the ETF to ensure it provides adequate diversification across different semiconductor companies. A well-diversified ETF can help mitigate the risk of investing in individual stocks. Evaluate the historical performance of the ETF compared to its benchmark index and peers. While past performance doesn’t guarantee future results, it can provide insights into how the ETF has performed under different market conditions. Then, review the top holdings of the ETF to see which semiconductor companies it invests in. Make sure these align with your investment goals and risk tolerance.
An ETF to consider
If you’re then looking for an ETF that checks all the boxes, consider VanEck Semiconductor ETF (NASDAQ: SMH). This is one of the most popular and widely traded semiconductor ETFs. SMH seeks to track the performance of the MVIS US Listed Semiconductor 25 Index. This index includes 25 of the largest U.S.-listed semiconductor companies, covering a broad spectrum of the semiconductor industry.
The ETF provides exposure to various segments within the semiconductor industry, including companies involved in the design, manufacture, and distribution of semiconductors and semiconductor-related products. Its top holdings also include companies such as Nvidia stock as well as the other major winners including Taiwan Semiconductor Manufacturing and Advanced Micro Devices.
What’s more, SMH typically has a relatively low expense ratio compared to actively managed funds, which helps minimize the costs associated with holding the ETF over the long term. SMH is also often highly liquid, meaning that there is usually significant trading volume, making it easier for investors to buy and sell shares without significant price impact.
Finally, the performance of SMH is tied to the overall performance of the semiconductor industry. Given the cyclical nature of the semiconductor market, the fund’s performance can be influenced by factors such as global demand for electronic devices, technological advancements, and macroeconomic trends. However, in the last year alone shares have climbed by 78%, as of writing.
Bottom line
Overall, if you’re looking to get into semiconductor stocks but don’t want to be tied down, SMH ETF is a great option. With a 0.35% expense ratio, shares up 27% year to date, and a 0.49% dividend yield, it’s certainly a strong option for investors to consider.
