The SOXX (iShares Semiconductor ETF) and SMH (VanEck Semiconductor ETF) are two well-known semiconductor-focused ETFs. Trying to figure out what the difference is between the two? I took a detailed look at both and came to the conclusion: Nothing dramatically different!
I dive into the details below, but two key points stand out: There are 22 common holdings between the two funds and these holdings account for around 91% of the weight in the two funds. Can the balance of the 9% in holdings make all the difference? If you’re curious, please continue reading!
Please note that the analysis is based on the holdings as of Q4 2022.
Mandate and Underlying Index
SOXX tracks the investment results of the ICE Semiconductor Index, which measures the performance of the equity securities of the 30 largest US-listed companies. Note that “US-listed” is different from “US-based”. Many foreign-based companies are listed on US stock exchanges, so you could still end up owning international companies in this case.
SOXX used to track the Philadelphia Semiconductor Index however they have switched over to tracking the ICE Semi index in 2022.
Companies classified within the semiconductors industry include companies that either manufacture semiconductors to be used in electronic applications or utilize LED and OLED display technology. The semiconductor industry also includes companies that provide services or equipment associated with semiconductor design and manufacturing.
SMH tracks the MVIS (MarketVectors Indexes) US Listed Semiconductor 25 Index, which is intended to track the overall performance of companies involved in semiconductor production and equipment. The index is a modified market cap-weighted index, and only includes companies that generate at least 50% of their revenue from semiconductors or semiconductor equipment.
Based on the underlying indices, the difference at the outset is in the number of holdings: SOXX has 30 vs SMH’s 25. The top 10-holdings for the two funds and their cumulative weight is presented in the table below:
As you can see, there is a strong overlap between the holdings, although the weightings for the individual names are different. The biggest standout difference for me is that SMH has a very high weight in Taiwan Semiconductor Manufacturing Co (TSMC) at 11.6%, which makes it their top holding. SOXX does hold TSMC, but their weight is lower at 3.8%
As I mentioned earlier, there are 22 names that overlap between the two funds. As SOXX holds 30 companies, that means SOXX has 8 unique names. Similarly, as SMH can hold 25 names, SMH has 3 unique names. Let’s take a look at what these unique holdings are in each:
Both funds have roughly 8.1% weight in unique names, but it’s clear that there’s a slight difference in the thrust of things.
SMH has two sizeable positions in Synopsys and Cadence. Both these companies provide software and services that are used in the design of semiconductor products. On the other hand, SOXX has allocated their 8.2% of unique names to mostly actual designers, vendors, and producers of semiconductors.
So there’s another big difference between the two funds: SMH brings in a slight exposure to software, whereas SOXX is all about the hardware. Keep in mind though, that we’re only talking about 8% of the fund, so hardly anything big. Also ultimately, all companies are affected by the same end drivers: demand for semiconductors, so there’s bound to be very similar results.
The geographic breakdown of the funds is close, but not the same. The two key differences for me are:
- US weight of nearly 90% in SOXX vs 78% in SMH. SMH allocates the rest to higher weights in other countries such as Taiwan and Netherlands.
- Taiwan weight of only 5% in SOXX vs 11% in SMH
It’s important to remember that the semiconductor industry is unique because although it is globalized, it is also highly integrated. The production chain for semiconductors stretches over many countries: An Intel chip might be designed in India and manufactured in the US! Similarly, an nVidia chip might be designed in the US and manufactured in Taiwan or South Korea. The suppliers for these fabs might be based in the Netherlands, the US, and Japan.
For these reasons, the country exposure is not as relevant in this case as it might be in other sectors. Chip stocks typically rise and fall based on the outlook for the end demand for semiconductors (on a global basis), the supply situation for these chips, and competitive dynamics.
However, the only reason I call out Taiwan specifically is because of the obvious risk of a China-Taiwan conflict. If there were ever to be a war between the two countries, SMH has a slightly higher downside risk as their weight in Taiwan is much higher.
It’s also important to contextualize this: in the event that the war actually does take place, global markets will be down significantly anyways; so a 6% weighting difference to Taiwan between the two funds will not be a huge differentiator of your portfolio returns – everything will be down!
Given the heavy overlap between the holdings of the two funds, their performance is virtually the same over the last 10 years, even when looking at various sub-periods. The table below shows the annualized returns over the last 1, 3, 5, and 10 year periods (as of August 31, 2022):
To look at this graphically, I have shown the comparison charts for the 1 and 5 year periods below.
Pretty identical, right?
The final point of difference between the two funds comes down to their expense ratios: SOXX charges 0.40% vs 0.35% for the SMH. I would not really worry about a 0.05% difference in the expense ratios between the two funds.
For each $1,000 invested in the funds, you’d be pay $0.50 higher in fees for the SOXX. The ETF price volatility is higher than that and you’re more likely to make or lose more than that based on what time of day you trade these funds.
Fund Size & Liquidity
As of mid-September, SOXX has around $6.1 billion in assets and the SMH has $6.2 billion in assets – again surprisingly very close!
The big difference is in the trading liquidity of the shares – SMH’s average trading volumes (3.96 million shares traded daily) is around 4x that of the SOXX (988k traded daily). However as SOXX has a slightly higher trading price, the average daily traded volume (using price as of pixel time) is not as large, but still significant. SMH is at around $811M of average traded daily volume v/s $351 million for the SOXX, making it around 2.3x larger.
In investing, the future matters much more than the past. We’ve had a big market correction in 2022, so now it’s important to understand what can happen in the future. There are two ways to think about this question: 1) What will lead to SOXX or SMH performance diverging in the future? 2) What is the outlook for semiconductor stocks in general?
Potential Sources for Divergence in Performance
Thinking about divergences in the future, there are two points that come to my mind, but both are not likely to be huge differentiators:
- Taiwan Exposure: As I already discussed, the exposure to Taiwan is around 6 percentage points higher in SMH vs SOXX, so in the event of a conflict, SMH may underperform the SOXX slightly. But both ETFs (along with the market) are likely to get hammered anyways.
- Software focus: SMH has two software companies which may offer some consolation against an oversupplied semiconductor market. But again, the weight in those two names is only around 8%, so it’s unlikely that this will make a major difference.
Outlook for Semiconductor Stocks
It’s always difficult to make short-term or even medium-term predictions on the direction of the market, so I will refrain from doing that here. What I will say however, for the reasons outlined in the section below, is that the long-term outlook for the semiconductor industry is solid.
There are very few industries that consistently grow at this pace and therefore it makes sense for investors to have solid exposure to this industry. And especially now, when the market is in a correction, you can buy this sector at a very nice discount to its fair value!
Why Invest in the Semiconductor Industry?
What are Semiconductors?
Semiconductors are materials that have been specifically designed to be used in electronic devices and circuits. They are made of materials like carbon, silicon, germanium, and silicon-germanium, which have been carefully processed to create materials with unique electrical properties. The materials are used in electronic devices to create rectifiers, transistors, and diodes, which form the most basic element of electronic circuitry.
As the name implies, semiconductors – sometimes conduct (or carry) electricity and sometimes they don’t. This effectively allows them to operate as a switch in digital circuits – which allows them to generate the 1’s and 0’s that we associate with digital devices.
The various basic elements (typically a transistor) is what forms the basis of the modern chips or integrated circuits (ICs). Integrated circuits are the heart of modern electronics, and without them, we would not have the amazing computing power that we do today. Semiconductors are an essential component of electronic devices like computers, cell phones, and solar panels. Without them, these devices would not function.
Why are Semiconductors Important?
It goes without saying that the world without electronics and digital products would look very different. Digital devices and products are present in almost every single device today, and this continues unabated. Even toasters now connect to WiFi – and they need multiple chips too!
Even within devices, the complexity rises as the functionality of each device continues to grow. Today’s smartphones are just as powerful as computers from less than 5 years ago. Computer chips, with increasing amounts of processing power, continue to cram in more and more transistors.
Without the increasing complexity and pervasiveness of semiconductors, it would not be possible to have the level of functionality today that we take for granted. Trends such as artificial intelligence, robotics, 5G, internet of things, autonomous driving, mobile communication, etc. will continue to demand an increasing amount of digital
And ultimately, these technological trends are not just fads, they are important life-saving and productivity-improving tools. Consider some example:
- MRI scanners with built-in AI can help a radiologist dramatically improve the speed and quality of diagnosis.
- Robots can perform dangerous tasks which might be unsafe for humans. Alternatively, they can simply help fill in a labour gap, especially in developed nations.
- Autonomous driving and driver assistance features can help reduce the frequency and severity of vehicle accidents.
- Smartphones and the internet have helped increase accessibility to information, allowing a democratized creator based economy!
The list is endless, and I think mostly everyone is familiar with the positive ramifications of technology!
Growth Rate in the Semiconductor Industry
As this slide from ASML shows, the market size of the semiconductor industry is growing dramatically in just the space of this decade. By 2030, the market size of the industry is expected to be three times what it was in 2020!
Typically I am skeptical of such rosy projections, but given the increasing trends towards digitization, I am willing to go along with some of these figures.