Investors often prefer instruments such as exchange-traded funds (ETFs) over individual stocks. Buying companies can involve significant risks, and having little knowledge of investing can lead to poor choices or indecision when the unexpected happens.
This may be especially true for semiconductor stocks. The industry is known for its cyclical nature, and investors may be hesitant to buy stocks like this Nvidiawhich is up more than 1,000% from its 2022 low. Companies like Intel could look risky after a recent decline.
Fortunately, one ETF has mastered the art of generating significant investor returns in this sector, and the ETF’s relatively low risk may make it a choice investors shouldn’t ignore.
The semiconductor ETF
The semiconductor ETF that investors may want to consider is the VanEck Semiconductor ETF (NASDAQ: SMH). This ETF invests all its assets in 26 of the top semiconductor stocks.
The weighting obviously varies. The aforementioned Nvidia is the largest holding, accounting for 21% of the fund. The main manufacturer, the less volatile Taiwanese semiconductor manufacturingis the second largest holding company, accounting for 13% of the ETF’s investments. Broadcom rounds the top three at 8%.
Every other holding is 5% of the fund or less, and strong industry players such as Intel AMD, ASMLAnd Micron also contribute to the success of the fund.
The returns and expense ratio of the VanEck ETF
Investors will likely respond well to the VanEck ETF’s 47% gain so far this year. Nevertheless, they should remember that this is a short time frame. The chip industry was generally in an upcycle this year, meaning returns do not include a downcycle, which is typical of the chip industry.
Still, the VanEck ETF has performed well during the down cycles. Since the fund’s inception in December 2011, the share price has risen by an average of 26% per year. This means that an investment of $10,000 on the day of incorporation would be worth approximately $201,000 today! If we only look at the past ten years, that average return increases slightly to 27%.
Furthermore, 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 for ETFs and mutual funds will average 0.36% in 2023. Given the returns, this suggests that investors are getting a bargain when it comes to fees.
A surprising comparison
Moreover, the VanEck Semiconductor ETF can be compared well with a solid investor in ETFs SPDR S&P 500 ETF Trust.
Granted, the SPDR ETF has significantly lower risk. Instead of a few stocks in one technology subsector, the SPDR ETF invests in 500 companies across multiple sectors. Plus, its 0.09% expense ratio makes it much cheaper to own.
By almost every other metric, however, the VanEck ETF is doing significantly better. Since its inception in 1993, the SPDR ETF has averaged approximately 11% annual return. A $10,000 investment on inception would be worth about $236,000 today, meaning the SPDR ETF has only offered slightly more total returns despite still being around for 18 years.
Moreover, the average return over ten years is 13% per year, about half the rate of the VanEck ETF. This indicates that taking on a slight increase in risk and a higher expense ratio has paid off for VanEck ETF investors.
Buy the VanEck Semiconductor ETF
If you want a simpler and less risky way to invest in semiconductor stocks, it may be difficult to find a better choice than the VanEck ETF at current risk levels.
Granted, investors should be aware of the risks of investing in a single sector, especially one as volatile as the chip industry. Additionally, 26 stocks may not provide enough diversification for more risk-averse investors.
Nevertheless, the fund’s returns have consistently outperformed S&P500 index. Since the fund’s annual expense ratio is just 0.35%, investors are likely to get a bargain if it can double the returns of the S&P 500. That factor alone will likely drive more tech investors to the VanEck ETF over time.
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Will Healy has positions in Advanced Micro Devices and Intel. The Motley Fool holds positions in and recommends ASML, Advanced Micro Devices, Nvidia, and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Broadcom and Intel and recommends the following options: short November 2024 $24 calls on Intel. The Motley Fool has a disclosure policy.
Looking for an easy and safer way to invest in the chip industry? This ETF could be your best option, originally published by The Motley Fool
