It’s hard to look past Nvidia (NASDAQ:NVDA) these days, but it’s important to remember that there are plenty of other great semiconductor (chip) stocks out there too. The VanEck Semiconductor ETF (NASDAQ: SMH) allows investors to gain exposure to both Nvidia and other attractive opportunities within the semiconductor sector.
I am bullish on SMH based on its strong portfolio of top semiconductor stocks, which are performing well and harbor significant long-term growth potential, as well as its incredible track record of generating strong returns for its holders. We’ve covered SMH before; it has performed well since then and remains an attractive long-term opportunity.
What is the strategy of the SMH ETF?
SMH is the largest dedicated semiconductor ETF. According to sponsor VanEck, SMH invests in the “MVIS US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor manufacturing and equipment.”
VanEck emphasizes the fact that these are highly liquid stocks, market leaders and companies with global scale.
Portfolio of attractive semiconductor stocks
SMH owns 26 stocks and the top 10 holdings represent 76.2% of the fund. Below is an overview of SMH’s top 10 holdings using TipRanks’ holdings tool.
While not particularly diversified, the fund offers investors significant exposure to Nvidia (which has a large 24.6% weighting) and other leading semiconductor stocks, including Taiwan Semiconductor (NYSE:TSM), Broadcom (NASDAQ:AVGO), Qualcomm (NASDAQ:QCOM) and more.
If it weren’t for Nvidia’s 209.6% gain over the past year, we’d probably hear more about Broadcom and its 111.8% gain. But the semiconductor and software infrastructure giant is now poised to become one of the world’s ten largest companies and deserves a lot of attention on its own merits. The stock is a long-term winner, generating an incredible total return of 3,168% over the past decade.
It’s also an undervalued dividend growth stock that has increased its dividend payout for 13 years in a row and has grown this payout at an impressive CAGR of 17.5% over the past five years. In addition, Broadcom, like Nvidia, is coming up with its own stock split.
The company recently announced that it will be conducting a 10-for-1 stock split, which will go live on July 12. While stock splits don’t necessarily make a fundamental difference, they can generate significant interest and momentum in a stock, as we recently saw with Nvidia. They can also make the shares more accessible to smaller investors and retail investors.
Besides Broadcom, Taiwan Semiconductor is another of the many attractive chip stocks among SMH’s top holdings.
Taiwan Semiconductor is the world’s largest and most advanced chipmaker. Leading semiconductor companies such as the aforementioned Nvidia, Broadcom, Qualcomm and others turn to Taiwan Semiconductor to manufacture the advanced chips they design and develop. This makes Taiwan Semiconductor an attractive anchor within the semiconductor space. The $786.1 billion company has seen its shares gain a cool 75.2% over the past year, hitting a new all-time high.
Then Qualcomm, which has seen a 93.8% increase in the past year, has made a name for itself as the company develops advanced semiconductors for everything from smartphones to cars and Internet of Things devices.
Additional top 10 positions, ASML (NASDAQ:ASML) and Lam Research (NASDAQ:LRCX), are among the few companies in the world that provide the high-tech tools and equipment used in the semiconductor manufacturing process, making them critical parts of the semiconductor value chain with wide moats (competitive advantages).
One thing that Broadcom, Taiwan Semiconductor and Qualcomm all have in common is that they all have “Perfect 10” Smart Scores. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It scores stocks from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an Outperform rating. Seven of SMH’s top 10 holdings have an Outperform-equivalent Smart Score of 8 or higher.
Furthermore, SMH has an Outperform equivalent ETF Smart Score of 8.
Sensational long-term performance
SMH owns a strong collection of highly rated semiconductor stocks, and has also long generated excellent returns for its holders, giving it a track record that is hard to beat.
As of May 31, SMH has achieved an enviable three-year annualized return of 25.5%. These stellar returns easily exceed those of the broader market. The Vanguard S&P 500 (NYSEARCA:VOO) delivered an annualized return of 9.6% over the same period. It even outpaces the strong performance of the tech-focused Technology Select Sector SPDR Fund (NYSEARCA:XLK), which delivered an annualized return of 15.9% over the same period.
Over an extended five-year period, SMH has generated a scorching annualized return of 38.6%. This figure again easily exceeds the broader market and XLK (VOO returned 15.8% annualized over the same period, while XLK returned 25.2% annualized). Note that these are both great returns, and SMH still beats them by a significant margin.
Even going back a decade, SMH has delivered a phenomenal annualized return of 27.8%, once again beating both the broader market and the tech-focused XLK. VOO delivered an annualized return of 12.7% over the same period, while XLK delivered a 20.3% annualized return.
What is SMH’s expense ratio?
SMH has a reasonable expense ratio of 0.35%, meaning an investor in the fund will pay $35 annually for a $10,000 investment. This isn’t the lowest fee out there, as many broad market index funds charge lower fees. However, it is comparable to its peers and reasonable enough for a sector-specific ETF, especially one that performs as well as SMH.
Is SMH Stock a Buy According to Analysts?
As for Wall Street, SMH gets a consensus rating of Moderate Buy, based on 21 Buys, five Holds, and zero Sell ratings assigned in the last three months. The average SMH stock price target of $285.18 implies 7.5% upside potential from current levels.
Takeaway for investors
In conclusion, I’m bullish on SMH because it offers investors substantial exposure to Nvidia and top semiconductor stocks like Broadcom, Taiwan Semiconductor, and others. Moreover, its phenomenal returns over the past three, five and ten years ensure that it has an untouchable track record.
Revelation
