The semiconductor industry is a fundamental pillar of the digital age. With soaring demand driven by technologies such as artificial intelligence, autonomous vehicles, cloud computing, and IoT, both institutional and retail investors are seeking effective ways to gain exposure to this sector. One of the leading options is the VanEck Semiconductor ETF (ticker: SMH), which offers concentrated exposure to U.S.-listed semiconductor companies.

Key Characteristics and Fund Composition

Launched in December 2011 and managed by VanEck, SMH tracks the MVIS US Listed Semiconductor 25 Index. The index includes up to 25 leading semiconductor companies listed on U.S. exchanges, including ADRs of foreign firms. As of the end of June 2025, the fund manages approximately $22.18 billion in assets, making it one of the largest in its category.

The fund is relatively concentrated: about 74% of assets are held in the top 10 companies, and the total portfolio consists of only 27 holdings. Nvidia (NVDA) alone represents over 21% of the fund, followed by Taiwan Semiconductor (TSM) at 11.4% and Broadcom (AVGO) at roughly 10%. This high concentration can drive outperformance during strong rallies but also heightens risk during volatility.

Performance and Returns

As of late June 2025, SMH has returned approximately 6.1% year-to-date and 2.3% over the past 12 months. Over a longer three-year horizon, the fund has delivered an impressive cumulative return of around 31.2%, reflecting sustained growth but also significant volatility.

The ETF has a beta of 1.71 relative to the broad market, indicating elevated risk. Its standard deviation over the past three years stands at approximately 35%, underscoring its volatility profile.

Costs and Dividends

One of SMH’s key advantages is its low annual expense ratio of 0.35%, which is highly competitive. The fund offers a modest dividend yield of about 0.45%, though this is not a major component of its total return, given that most underlying companies reinvest profits for growth.

Investor Benefits

Targeted Exposure to a Growth Sector: SMH provides direct access to the high-growth semiconductor space, benefiting from long-term tech trends.

Low Fees: The ETF’s low expense ratio supports efficient cost structure for investors.

High Liquidity: With significant daily trading volume, SMH offers ease of access and low transaction spreads.

Risks and Challenges

Concentration Risk: Heavy weighting in a few stocks, especially Nvidia, means fund performance can be heavily influenced by individual companies.

Cyclicality: The semiconductor sector is highly sensitive to macroeconomic cycles, including supply chain disruptions, regulatory shifts, and geopolitical tensions (e.g., U.S.-China or China-Taiwan).

Valuation Risk: The fund’s aggregate P/E ratio is around 36, suggesting relatively high valuations that could lead to downside if expectations aren’t met.

Comparison with Competitors

Compared to peer ETFs such as SOXX (iShares Semiconductor ETF) and XSD (SPDR S&P Semiconductor ETF), SMH is more top-heavy and less diversified. XSD, for example, uses an equal-weight strategy, distributing risk more evenly across constituents. While SMH has outperformed both over the past three years, it does so with a higher risk profile.

Conclusion

SMH offers a focused investment vehicle for those seeking exposure to the semiconductor industry through a liquid, low-cost ETF. Its strengths include strong historical performance, targeted access to leading companies, and cost efficiency. However, investors should be aware of its elevated volatility, concentration in a few names, and sensitivity to macroeconomic factors. As such, SMH may be suitable primarily for long-term investors who understand the cyclical nature of the technology sector and are comfortable with its inherent risk.