Semiconductor Stronghold: Competitive Advantages Create Collective Success

Semiconductors stand at the forefront of modern technology, driving the functionality of electronic devices across various industries. These tiny components play a vital role in powering everything from smartphones to cloud computing servers to artificial intelligence (AI).

The continued adoption of digital technologies across various sectors, including healthcare, automotive, consumer electronics, and industrial automation, is expected to drive demand for semiconductors moving forward. As we continue to ride the wave of technological advancement, semiconductors and artificial intelligence stand at the forefront of this evolution. Together, they drive each other’s growth, propelling us into an unprecedented era of technological revolution. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade.

Semiconductors Come with Wide Moats

Morningstar’s approach to assessing economic moats provides valuable insight into the semiconductor landscape. 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.

SMH ETF “Moat” Exposures

Strong Competitive Advantages in SMH’s Two Largest Holdings¹

• NVIDIA (NVDA) – Moat Rating: Wide: Nvidia’s competitive advantage in the GPU market stems from its pioneering role in graphics processing technology, continuous innovation, and deep expertise in parallel computing. The company enjoys a wide economic moat due to its extensive portfolio of patents, cutting-edge research and development, and strong ecosystem of software and developer tools, which have solidified its dominance in gaming, professional visualization, and, notably, the burgeoning field of artificial intelligence. Nvidia’s GPUs are highly preferred for deep learning and AI applications, creating a virtuous cycle where increased usage in AI drives demand for its products, further entrenching its market leadership. This advantage is compounded by high barriers to entry in the GPU market, including significant capital expenditure and technological know-how, deterring potential competitors and securing Nvidia’s position at the forefront of the industry.
• Taiwan Semiconductor Manufacturing Company Limited (TSM) – Moat Rating: Wide: TSM enjoys a significant competitive advantage due to its advanced technological capabilities, scale, and efficiency in producing logic chips. As the world’s largest outsourced semiconductor foundry for logic chips, the company’s services are irreplaceable for customers that include vertically integrated original-equipment manufacturers and fabless semiconductor companies. 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. 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.

Accessing a Team of Winners

We believe the VanEck Semiconductor ETF (SMH) is an attractive way for investors to access the growth potential of semiconductor companies. Rather than attempting to pick individual stock winners in the ever-evolving semiconductor sector, SMH provides exposure to the top 25 most liquid U.S.-listed semiconductor companies, spanning the entire industry value chain from chip design and fabrication to manufacturing machinery.

SMH holds a broad array of companies, each a leader within the semiconductor ecosystem with its own economic moat and specialized niche, from AI players to hardware. This diversification uniquely creates a “team of winners,” which face low competition with each other because the top players “win together” and collectively benefit as demand for semiconductors grows.

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