Investors often like to turn to vehicles such as exchange-traded funds (ETFs) rather than individual stocks. Buying companies can carry significant risks, and when one has little investing knowledge, it can lead to poor choices or indecision when the unexpected happens.
This can be particularly true of semiconductor stocks. The industry is notoriously cyclical, and investors may feel leery of buying stocks such as Nvidia, which has been up more than 1,000% from its bottom in 2022. In contrast, companies like Intel could appear risky after a recent decline.
Fortunately, one ETF has mastered the art of driving significant investor returns in this industry, and the relatively low risk of the ETF may make it a choice investors should not ignore.
The semiconductor ETF
The semiconductor ETF investors may want to consider is the VanEck Semiconductor ETF (SMH -1.01%). This ETF invests all of its assets in 26 of the top semiconductor stocks.
Weighting varies, of course. The aforementioned Nvidia is the largest holding, making up 21% of the fund. Its primary manufacturer, the less volatile Taiwan Semiconductor Manufacturing, is the second-largest holding, making up 13% of the ETF's holdings. Broadcom rounds up the top three at 8%.
Every other holding is 5% of the fund or less, and industry stalwarts such as Intel, AMD, ASML, and Micron also contribute to the fund's success.
The VanEck ETF's returns and expense ratio
Investors will likely react well to the VanEck ETF's 47% increase so far this year. Nonetheless, they should remember that this is a short time frame. The chip industry was generally in an upcycle this year, meaning that return does not include a downcycle, which is characteristic of the chip industry.
Still, the VanEck ETF has fared well over downcycles. Since the fund's inception in December 2011, its share price has risen by an average of 26% per year. This means a $10,000 investment on inception day would be worth around $201,000 today! If looking at just the last 10 years, that average return rises slightly to 27%.
Additionally, investors have benefited from VanEck's management at a reasonable cost. The fund charges an ETF expense ratio of 0.35%. According to Morningstar, expense ratios average 0.36% for ETFs and mutual funds in 2023. Considering its returns, this indicates investors are getting a bargain when it comes to fees.
A surprising comparison
Furthermore, the VanEck Semiconductor ETF compares well to a stalwart in ETF investing -- the SPDR S&P 500 ETF Trust.
Admittedly, the SPDR ETF is significantly lower risk. Instead of a few stocks in one technology subsector, the SPDR ETF invests in 500 companies across multiple industries. Also, the expense ratio of 0.09% makes it far cheaper to own.
However, by just about every other measure, the VanEck ETF fares significantly better. Since its inception in 1993, the SPDR ETF's returns have averaged about 11% yearly. A $10,000 investment at inception day would be worth about $236,000 today, meaning the SPDR ETF has offered only slightly more in total returns despite existing for 18 additional years.
Also, its 10-year average return comes in at 13% annually, about half the percentage of the VanEck ETF. This indicates that taking on a slight increase in risk and a higher expense ratio has paid off handsomely for VanEck ETF's investors.
Buy the VanEck Semiconductor ETF
If one wants a simpler and less risky way to invest in semiconductor stocks, one might struggle to choose better than the VanEck ETF at current risk levels.
Admittedly, investors need to be cognizant of the risks of investing in a single industry, particularly one as volatile as the chip industry. Also, 26 stocks may not offer enough diversification for more risk-averse investors.
Nonetheless, the fund's returns have consistently outperformed the S&P 500 index. Since the fund's annual expense ratio is just 0.35%, investors are arguably getting a bargain if it can double the S&P 500's returns. That factor in itself will likely drive more tech investors into the VanEck ETF over time.
