This ETF has outperformed the S&P 500 for a long time.
Investors often prefer to look at vehicles such as exchange-traded funds (ETFs) rather than individual stocks. Acquiring a company can involve significant risks, and having little investment knowledge can lead to poor choices and indecision when unexpected events occur.
This is especially true for semiconductor stocks. The industry is notoriously cyclical, and investors may be hesitant to buy a stock like Nvidia, which is up more than 1,000% from its 2022 lows. In contrast, a company like Intel may look risky after its recent selloff.
Fortunately, some ETFs have mastered the art of significantly increasing investor returns in this industry, and the relatively low risk of ETFs may make them an option investors should ignore.
semiconductor ETF
A semiconductor ETF that investors may want to consider is VanEck Semiconductor ETF (SMH -0.03%). This ETF invests all of its assets in 26 top semiconductor stocks.
Of course the weighting is different. The aforementioned Nvidia is the largest holding, accounting for 21% of the fund. Its main manufacturer, Taiwan Semiconductor Manufacturing Co., Ltd., accounts for 13% of the ETF’s holdings, making it its second-largest holding. Broadcom rounds up the top three at 8%.
All other holdings are less than 5% of the fund, and industry heavyweights such as Intel, AMD, ASML, and Micron also contribute to the fund’s success.
VanEck ETF return and expense ratio
Investors will likely respond well to the VanEck ETF’s 47% gain so far this year. Nevertheless, it must be remembered that this is a short period of time. The chip industry has generally been in an upcycle this year, meaning that returns do not include the downcycles that characterize the chip industry.
Still, the VanEck ETF has weathered down cycles well. Since the fund’s inception in December 2011, stock prices have increased an average of 26% per year. This means that your $10,000 investment on your start date is now worth approximately $201,000. If we look at just the past 10 years, the average return has increased slightly to 27%.
Additionally, investors benefit from VanEck’s management at a reasonable cost. This fund has an ETF expense ratio of 0.35%. According to Morningstar, the average expense ratio for ETFs and mutual funds in 2023 is 0.36%. Considering its returns, this represents a bargain for investors in terms of fees.
amazing comparison
Additionally, the VanEck Semiconductor ETF rivals the SPDR S&P 500 ETF Trust, a powerhouse of ETF investing.
To be sure, the SPDR ETF is significantly less risky. The SPDR ETF invests in 500 companies across multiple industries, rather than just a few stocks in one technology subsector. It also has an expense ratio of 0.09%, making it much cheaper to own.
But by every other measure, the VanEck ETF is significantly better. Since its inception in 1993, the SPDR ETF has returned approximately 11% annually. Your $10,000 investment on your start date would be worth about $236,000 today. This means that even though the SPDR ETF has been around for another 18 years, it has only increased marginally in total return.
And its 10-year average return is 13% per year, about half that of the VanEck ETF. This indicates that the small increase in risk and higher expense ratio has paid off well for VanEck ETF investors.
Buy VanEck Semiconductor ETF
If you’re looking for a simpler, less risky way to invest in semiconductor stocks, you might be hard-pressed to find a better option than the VanEck ETF at current risk levels.
Certainly, investors need to be aware of the risks of investing in a single industry, especially one as volatile as the chip industry. Also, 26 stocks may not provide enough diversification for more risk-averse investors.
Despite this, the fund’s returns have consistently outperformed the S&P 500 index. The fund’s annual expense ratio is just 0.35%, so if it can double the return of the S&P 500, it’s a bargain for investors. This factor in itself will likely drive more tech investors to invest in the VanEck ETF over time.
Will Healy holds positions at Advanced Micro Devices and Intel. The Motley Fool has positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: November 2024 $24 short calls on Intel. The Motley Fool has a disclosure policy.
