Driven in part by AI, the global semiconductor industry is in a transformational period where innovation is key. That could open the door to opportunities with fabless semiconductor firms. That group is accessible in basket form thanks to the VanEck Fabless Semiconductor ETF (SMHX).
The fund debuted in August as the first ETF dedicated to fabless chipmakers. Those are companies in the space focusing exclusively on design and innovation. They farm out production to foundry operators such as Taiwan Semiconductor.
Now, “fabless” doesn’t imply “obscure”; quite the contrary, as proven by the SMHX roster. The rookie ET tracks the MarketVector US Listed Fabless Semiconductor Index. It holds many well-known chip stocks. Those include Nvidia (NVDA) and Broadcom (AVGO) combining for over 36% of the fund’s roster.
Fabless Could Be Fantastic Over Long Term
AI is the glamour story in the tech universe. But fabless chip companies have made significant inroads in other disruptive tech arenas, including internet of things (IoT). Said another way, the edge computing that powers IoT is reliant on chips, most of which arrive courtesy of fabless firms.
“Without edge computing, which stores data close to the device, the smart fridge would rely entirely on the cloud for this data processing,” noted Nick Frasse, associate product manager at VanEck. “This means every time you add a new item, that data would need to travel to a distant server, be analyzed, and then return with the updated information. Not only could this introduce frustrating delays, like when you’re rushing to prepare a meal—but it also can slow down functionality and strain network resources because the fridge has to send and receive constant data.”
Arm Holdings (ARM), Ambarella (AMBA), and Synaptics (SYNA) are examples of SMHX holdings with leverage to the edge computing trade. That trio combines for about 7% of the ETF’s portfolio.
As Frasse pointed out, those companies make chips that are the “brains” of many edge computing devices. That could be indicative of long-term opportunity with SMHX, particularly as global devices become increasingly connected.
“With the world moving toward more connected, data-driven devices, fabless semiconductor companies are uniquely positioned to meet this demand. Their design-focused model allows them to create advanced chips for a variety of edge applications, from consumer electronics to industrial automation,” added Frasse.
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