Five semiconductor ETFs after the Nvidia effect

Semiconductor ETFs have been a rare bright spot in recent years with investor buzz surrounding AI and chipmaker stocks such as Nvidia driving strong inflows, product launches and electrifying gains.

Unlike the small cap tilt of many future themes, the semiconductor industry is dominated by a handful of behemoths able to continue spending on research and development while pouring billions into new fabrication plants.

However, like the rest of the thematic roster, semiconductor ETFs still have to balance the triangular trade-off between purity, liquidity and diversification, yielding highly opposed views on how to slice the market.

Chart 1: Semiconductor ETF stat attack

VanEck’s SMH

First up is the largest ETF in class, the $2.4bn VanEck Semiconductor UCITS ETF (SMH), which has seen its assets under management (AUM) more than double from $1bn last June, owing to a mixture of market performance and inflows.

SMH launched during the tail end of COVID-19 lockdowns – in December 2020 – as a mirror of an existing US strategy. The ETF physically replicates the MVIS US Listed Semiconductor 10% Capped ESG index of 25 companies deriving at least 50% of their revenues from semiconductors.

The index is reviewed semi-annually, rebalanced quarterly and crucially caps stocks at a 10% weighting at each rebalance. This means Nvidia comprises 10% of SMH’s basket as at 30 June, keeping it within half a percent of the allocation to peers including Broadcom and TSMC.

Although SMH has the most concentrated basket of the roster, its constrained Nvidia allocation means it has booked the third-strongest performance over the past year, with 55.2% returns over the 12 months to 23 July.

BlackRock’s SEMI

Taking a theoretically opposite approach is Europe’s second-largest semiconductor ETF, the $1.2bn iShares MSCI Global Semiconductors UCITS ETF (SEMI), which debuted in August 2021.

SEMI physically replicates the MSCI ACWI IMI Semiconductors & Semiconductor Equipment ESG Screened Select Capped index, capturing 279 large, mid and small-cap securities across 23 developed markets and 24 emerging markets classified within the semiconductor and semiconductor equipment group within the Global Industry Classification Standard (GICS).

While seemingly casting a much broader net than SMH, SEMI allocates a single basis point or less to 118 of its constituents and in fact awards a weighting of more than a percent to just 21 positions.

This means its primary focus is on a similar group of companies, albeit with some added diversification – or dilution – explaining its relatively more conservative 45.1% gain over the trailing 12 months, as well as the ETF easily boasting the lowest returns volatility in class over the period.

Amundi’s CHIP

Adopting a high-octane alternative route to semiconductor exposure is the $497m Amundi MSCI Semiconductors ESG Screened UCITS ETF (CHIP), which not only boasts the strongest returns in this theme’s roster, but also the strongest returns of any UCITS ETF over the trailing five-year period, at the time of writing.

Although looking to the same index provider as SEMI, CHIP’s underlying MSCI ACWI Semiconductors & Semiconductor Equipment ESG Filtered index of 75 companies is currently a single stock joyride.

Where its larger rivals apply the more conventional 5/10/40 UCITS diversification rules, CHIP applies a 20/35 methodology, meaning its largest component can comprise up to 35% of its basket between rebalances. As such, Nvidia comprises 31.1% of CHIP’s basket at the time of writing, while its next largest constituent – Broadcom – claims an 11.7% weighting.

While letting Nvidia’s weighting run up has enabled CHIP to surge 76.9% over the trailing 12 months – and 251.2% over five years – this has come at the cost of doing away with diversification.

Illustrating this, between the start of 2023 and the end of Q1 this year, a staggering 74.4% of the ETF’s 143.1% gain during this period was attributable to Nvidia alone. For comparison, the chipmaker comprised 31.7% of SMH’s returns over the same period.

HSBC AM’s HNSS

Moving to the more nascent corners of the roster, the $65m HSBC Nasdaq Global Semiconductor UCITS ETF (HNSS) returns to a more diversified route to semiconductor exposure.

Debuting in January 2022, HNSS physically replicates the Nasdaq Global Semiconductor index of the 80 largest semiconductor companies classified under the semiconductors or production technology subsectors of FTSE’s Industry Classification Benchmark (ICB).

Much like SMH and CHIP, HNSS awards its largest five allocations to large cap semiconductor ‘usual suspects’, with weightings between 7-9%.

Similarly, positioning between the two largest ETFs in terms of how far it moves down the semiconductor market cap spectrum sees HNSS book middling returns within the roster of 48.6%.

Fineco AM’s FAMMWS

Rounding off the pack, an entry from the asset management arm of Italian bank Fineco offers a non-ESG iteration of Amundi’s Nvidia rodeo.

The $38m Fineco AM MSCI World Semiconductors and Semiconductor Equipment UCITS ETF (FAMMWS) physically replicates the eponymous MSCI index of 38 large and midcap companies within the semiconductor and semiconductor equipment GICS industry groups.

FAMMWS has booked stellar 68.8% gains over the trailing 12 months. Unlike CHIP, its Nvidia weighting has been reduced to 8.5%, however, this comes after the stock’s weighting in its underlying benchmark boomed to 48.1% by the end of June.

Remembering what an ETF is for

Overall, SMH earns its position as Europe’s most popular semiconductor ETF. While concentrated in number of positions, its capping methodology ensures it balances purity of exposure among top semiconductor names with diversification.

For those looking to ride the Nvidia wave for as long as it lasts, there are single stock exchange-traded products (ETPs) or direct company equity that will serve that purpose.