At first glance, it may seem unwise to speak negatively about the situation Nasdaq100 and its associated exchange-traded fund (ETF), the Invesco QQQ Trust (NASDAQ: QQQ). Considering that the $100,000 invested 20 years ago is now worth about $1.3 million, it has clearly served as an excellent investment vehicle.
However, one technology segment stands out for its performance: semiconductors. Despite a relatively high level of volatility, chips have driven the technology industry, significantly increasing returns on technology. So instead of investing in the Nasdaq 100 through the Invesco QQQ Trust, one could consider a particular semiconductor ETF that could provide higher returns.
The semiconductor ETF
This fast growing investment is the VanEck Semiconductor ETF (NASDAQ: SMH).
Admittedly, the VanEck ETF carries a higher risk. With this fund, investors go all-in, not only on technology, but also on a specific part of the tech industry. Furthermore, instead of 100 shares, the VanEck fund only owns 26 shares.
By comparison, the Nasdaq 100 has a 59% allocation to technology at the end of the first quarter of 2024. Yet that index has interests in ten industrial sectors, a factor that provides some diversification.
Additionally, VanEck ETF shareholders pay an expense ratio of 0.35%, higher than Invesco QQQ’s 0.20%.
However, the managers appear to deserve the higher compensation. Over the past year, the fund has risen 72%. Extending the timeline over ten years, including downtimes for the sector and the market as a whole, investors have achieved an average return of almost 27% per year. This exceeds the average return on the Invesco QQQ over the past 10 years of 19% per year.
|
VanEck Semiconductor ETF versus Invesco QQQ (annual % return as of March 31, 2024) |
||||
|---|---|---|---|---|
|
A year |
Three years |
Five years |
10 years |
|
|
VanEck ETF |
72% |
24% |
35% |
27% |
|
Invesco QQQ |
39% |
12% |
21% |
19% |
Data sources: VanEck, Invesco.
Furthermore, ironically, some of the higher returns could be due to cyclicality within the semiconductor industry. While investors benefit from significant upside opportunities in the chip industry, it is also known for significant sell-offs during downtimes. The selloff is so severe that the Nasdaq 100 will occasionally outperform the VanEck fund.
Nevertheless, investors should remember that the chip industry has recovered from every past downturn. So if you see a time when the Nasdaq 100 is outperforming the ETF over a one- or three-year period, this is probably one of the best times to add shares of the VanEck fund.
The equity investments of the VanEck ETF
The VanEck Semiconductor ETF has also earned its returns by making significant but calculated bets on specific semiconductor stocks.
Not surprisingly, this is the largest position Nvidia, accounting for almost 21% of the fund’s investments. Nvidia currently dominates the artificial intelligence (AI) chip market, helping it achieve triple-digit revenue growth in recent quarters. That probably drove a significant portion of this year’s returns.
Moreover, it takes a different kind of risk with its 13% stake Taiwanese semiconductor. As the dominant manufacturer of high-end chips, it has not experienced the volatility of Nvidia. Being the most advanced chip manufacturer also puts it in a good position to benefit from AI.
The only other stock with a stake significantly higher than 5% is Broadcom, which makes up just under 8% of the fund. The specialist business-to-business chip designer has benefited from strong demand for AI accelerators and networking products in AI data centers, more than doubling its inventory over the past year.
The remaining 23 stocks are positions of 5% or less in various parts of the chip industry. This can range from chip design companies such as Qualcomm to analog chip companies such as Texas Instruments Unpleasant ASML, a leader in equipment manufacturing. These include all major sub-segments within the semiconductor industry. Because the sector serves a wide range of needs and customers, this gives the fund more balance than one might think.
Thanks to the sector’s strong performance over the years, such stocks have collectively made a significant contribution to the fund’s returns. With AI reigniting demand for semiconductors, this dynamic is unlikely to change anytime soon.
Investing in the VanEck Semiconductor ETF
The VanEck Semiconductor ETF has outperformed index stocks like the Invesco QQQ thanks to calculated bets and sustained growth in the chip industry.
Granted, a fund with 26 stocks is riskier than one with 100, and betting solely on one sector could hurt investors in the long run.
Nevertheless, the technology industry is heavily dependent on semiconductors, a factor that has led to outsized returns over extended periods of time. While no investor should go all-in on semiconductors, the sector is too crucial not to have an interest. Ultimately, the VanEck Semiconductor ETF allows investors to benefit from this sector while mitigating its risks.
Should you invest $1,000 in VanEck ETF Trust – VanEck Semiconductor ETF now?
Consider the following before purchasing shares in VanEck ETF Trust – VanEck Semiconductor ETF:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and VanEck ETF Trust – VanEck Semiconductor ETF was not one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia made this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $652,342!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns May 13, 2024
Will Healy has positions at Qualcomm. The Motley Fool holds positions in and recommends ASML, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing, and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Forget the Nasdaq 100, buy this ETF instead and it was originally published by The Motley Fool
