Technology and semiconductor ETFs have been generating a lot of buzz among investors and advisors this year. Considering the importance of technology to the global economy, especially as digitization and automation continue to ramp up, funds capturing the space are likely to see sustained interest from investors.
However, many investors are uncertain about which ETFs to invest in and how they should access these slices of the markets. Should they adopt a broad approach or opt for a more granular strategy? In this article, we will explore the performance and characteristics of key ETFs representing the semiconductor and technology categories, respectively, using advanced data analytics tools provided by LOGICLY.
SMH & XLK in Focus
The VanEck Semiconductor ETF (SMH) offers investors a way to track the performance of U.S.-listed businesses involved in the production of semiconductors. With an inception date of December 20, 2011, the fund has an established track record. The fund has a substantial $9.0 billion in AUM, making it the largest ETF to focus on the semiconductor industry. SMH also comes with an expense ratio of 0.35%, in the middle of the range for its peers.
The fund’s top holdings include NVIDIA Corporation (19.36%), Taiwan Semiconductor Manufacturing Co. (11.42%), Broadcom Inc. (5.28%), and ASML Holding NV ADR (5.05%). In all, the fund’s underlying index includes 25 securities.
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The Technology Select Sector SPDR Fund (XLK), which launched on December 16, 1998, has a broader sector-wide focus and offers investors the opportunity to gain exposure to several tech powerhouses. The fund has $49.1 billion in AUM — it’s among the 50 largest U.S.-listed ETFs and ranks as the second-largest technology ETF.
XLK’s top holdings among the 66 securities in its portfolio include Apple Inc. (23.47%), Microsoft Corporation (23.12%), NVIDIA Corporation (4.70%), and Broadcom Inc. (4.31%). With a 0.10% expense ratio, the fund costs less than the majority of its peers.
10-Year Performance Comparison of the Funds
With the assistance of LOGICLY’s charting tools, we can examine the 10-year performance difference between these two funds. SMH and XLK displayed relatively similar performance, closely tracking each other, until 2016. That’s when the trendlines on the performance graph start to noticeably diverge. However, that gap widened even more rapidly in the wake of the 2020 market crash sparked by the pandemic.
The COVID-19 pandemic highlighted the importance of technology for the global economy, but even more so, it highlighted how increasingly vital semiconductors are to that technology. The semiconductor shortage sparked mainly by pandemic-related supply chain issues was perhaps most visibly disruptive to the automobile industry but also saw its effects leave a mark on the communications, aerospace, and defense industries, among others.
From July 2013 to July 2023, SMH returned 775.53%, while XLK trailed with a return of 535.34%.
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While the cumulative performance over the past 10 years provides an overview for investors, both funds have done very well year-to-date. XLK is up 38.18% a little more than halfway through the year, so the broad technology sector is doing pretty well compared to the SPDR S&P 500 ETF Trust (SPY), which is up 15.54% year-to-date. However, semiconductors are key drivers of XLK’s performance, and SMH is up 46.89%, significantly more than SPY or even XLK.
A lot of that can be attributed to the performance of NVIDIA Corporation, which represents nearly 20% of SMH’s portfolio and is up more than 190% year-to-date. XLK also offers exposure to NVIDIA, but with a weight of less than 5% in the stock, it has not benefited as much.
For an investor looking to gain broad exposure to large-cap stocks in the technology sector, XLK is likely a perfectly acceptable investment. Keep in mind that it provides exposure to the largest players in the semiconductor industry under its broad technology mandate, so investors in that fund aren’t missing out entirely on the semiconductor boom. However, investors who want to get exposure to the vital components that power the technology sector may want to consider a dedicated fund like SMH.
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