Advisors and investors have plenty of semiconductor ETFs to consider. However, due diligence is required. These ETFs aren’t created equal nor are they mirror images of one another.
That homework is worth it because it can assist investors in identifying the pros and cons of various chip ETFs. On that note, one of the funds in this category sporting a clear set of advantages is the VanEck Semiconductor ETF (SMH). The $17.32 billion SMH is over 12 years old. Over that time, it’s developed a reputation as one of the top-performing semiconductor ETFs.
One reasons for SMH’s bullish long-term performance is that the ETF leans into chipmakers with the wide moat designation. Perhaps more than its rivals do. The wide moat designation is accurately applied to an array of semiconductor firms. But SMH truly delivers the wide moat goods.
Why SMH Has Wide Moat Advantages
SMH has some wide moat proximity due to VanEck being the issuer behind a venerable suite of wide moat ETFs, including the VanEck Morningstar Wide Moat ETF (MOAT). MOAT and the other VanEck wide moat ETFs adhere to the Morningstar methodology that identifies companies with stout competitive advantages.
“Morningstar’s approach to assessing economic moats provides valuable insight into the semiconductor landscape,” noted VanEck’s Nicholas Frasse. “Economic moats are sustainable competitive advantages that are expected to allow companies to fend off competition and sustain profitability into the future. Wide moat companies in the semiconductor space include those specializing in peripheral chips, chip equipment, and graphics processors. These companies demonstrate strong competitive positions and are likely to maintain their market dominance for decades.”
As Frasse points out, 69.35% of SMH’s member firms are classified as wide moat names. That’s more than triple the ETF’s exposure to stocks with the narrow moat designation. SMH’s wide moat perks, though broad-based, are apparent at the top of its lineup as Nvidia (NVDA) and Taiwan Semiconductor (TSM) fit that bill. That duo combines for more than 36% of the ETF’s roster.
Nvidia has garnered plenty of attention for its exposure to high-growth areas and its jaw-dropping rally. But TSM’s status as the world’s largest chip foundry operator shouldn’t be ignored.
“TSM’s wide economic moat is further bolstered by the substantial capital investment and technical expertise required to compete in this space, creating high barriers to entry,” concluded Frasse. “Moreover, the company’s focus on research and development. Coupled with its reputation for reliability, quality, and timely delivery, cements its critical position in the global semiconductor supply chain, making it indispensable to industry leaders and maintaining its market dominance.”
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