In the world of exchange-traded funds (ETFs) that specialize in investing in semiconductor companies, two stand out as notable performers – iShares PHLX Semiconductor ETF (SOXX) and VanEck Vectors Semiconductor ETF (SMH). While both funds provide investors with access to the semiconductor industry, their performance during times of market volatility can differ significantly.
One significant reason behind the better performance of SMH compared to SOXX is the difference in their respective portfolio compositions. SMH holds a more diversified portfolio with exposure to a broader range of semiconductor companies, including firms involved in equipment manufacturing and design, as well as those focused on the production of semiconductor materials. This diversification helps SMH to better weather fluctuations in individual companies or subsectors within the semiconductor industry.
In contrast, SOXX has a more concentrated focus on companies involved primarily in semiconductor design and manufacturing. While this targeted approach can lead to higher returns during periods of industry outperformance, it can also expose the fund to greater volatility when specific companies or segments face challenges or downturns.
Another factor contributing to SMH’s relative outperformance is the weighting methodology used by the ETF. SMH adopts a modified market cap-weighted approach, which allows larger companies to have a more significant impact on the fund’s performance. This can be beneficial during times when larger semiconductor companies are driving the industry’s growth and stability.
On the other hand, SOXX follows a traditional market cap-weighted methodology, where companies are weighted based on their market capitalization. While this approach provides a straightforward and transparent investment strategy, it may lead to a heavier reliance on a few key players within the semiconductor industry, resulting in greater susceptibility to stock-specific risks.
Additionally, the geographic exposure of the two ETFs also plays a role in their performance divergence. SMH includes a higher proportion of companies with global operations, spreading risk across different regions and markets. In contrast, SOXX is more heavily weighted towards U.S.-based semiconductor companies, making it more susceptible to domestic economic conditions and regulatory changes.
In conclusion, the distinct portfolio compositions, weighting methodologies, and geographic exposures of SMH and SOXX explain the differences in their performance during market fluctuations. While SOXX’s focused approach can lead to higher returns in bullish markets, SMH’s diversified portfolio and modified market cap-weighting strategy have enabled it to hold up better during challenging times in the semiconductor industry. Investors seeking exposure to semiconductor companies should consider these factors when selecting an ETF that aligns with their risk tolerance and investment goals.
