While both the VanEck Vectors Semiconductor ETF (SMH) and the iShares PHLX Semiconductor ETF (SOXX) are sector-specific investments that devote their distinct portfolios to the semiconductor industry, recent market trends have demonstrated that SMH appears to be outperforming SOXX. Despite some similarities, several underlying factors contribute to this variance, including the fund structure, portfolio composition, geographic exposure, and trading volumes.
One primary factor that contributes to the varying performance between these two exchange-traded funds (ETFs) is the difference in their fund structure. SMH follows a Market Capitalisation Weighted Index strategy that focuses on the largest companies in the sector by market capitalisation. This means that the largest stocks have the most significant impact on the ETF’s performance. On the other hand, SOXX follows a Modified Market Capitalisation Weighted Index, where the index weights are adjusted to limit the influence of the largest stocks, allowing smaller companies to have a more significant impact. Therefore, in periods where larger companies tend to outperform, SMH may have an edge.
Secondly, the portfolio composition of these two semiconductor ETFs is conspicuously distinct, which further explains their individual performance variances. SMH is significantly more concentrated than SOXX, with SMH’s top ten holdings accounting for about 57% of the fund, whereas SOXX has a more diversified portfolio with its top ten holdings making up about 48%. Consequently, if the major holdings of SMH outperform the leading stocks in SOXX, it contributes to a better overall performance for SMH.
Regarding geographic exposure, SMH has approximately 73% of its total net assets invested in the United States, and the rest are spread among Taiwan, the Netherlands, and a few other countries. In contrast, SOXX has about 81% of its assets in the United States. Subsequently, this could mean that SMH benefits when global semiconductor stocks do well, and SOXX might lack behind.
Lastly, the difference in trading volumes displays an interesting perspective on both the funds. SMH sees higher daily trading volumes than SOXX, thus suggesting it as the more popular investment choice among investors. More popular ETFs often have more liquidity which can lead to lower bid-ask spreads, a characteristic often sought by investors for better entries and exits.
In conclusion, while both SMH and SOXX represent a segment of the semiconductor industry, they are inherently different in various aspects. The differing structures, portfolio compositions, geographic exposures, and trading volumes between the two could explain SMH’s better performance than SOXX. Investors should keep in mind these variances and align their choice with their investment strategy, risk tolerance, and investment horizon when selecting the fund that best suits them.
