Semiconductor ETF Showdown: VanEck SMH’s Stunning Outperformance Against iShares SOXX

The world of exchange-traded funds (ETFs) tracking the U.S. semiconductor industry is witnessing an unprecedented divergence. While both the VanEck Semiconductor ETF (SMH) and the iShares Semiconductor ETF (SOXX) have historically delivered similar returns, a massive gap has opened in 2024, leaving many investors questioning the reasons behind this dramatic shift. SMH boasts a remarkable 42% gain this year, significantly eclipsing SOXX’s 15% increase. This 26-percentage-point difference, the largest in over a decade, highlights the critical importance of understanding the nuances of these seemingly similar funds.

Key Takeaways:

• VanEck SMH (SMH) is outperforming iShares SOXX (SOXX) by a staggering 26 percentage points in 2024.
• The primary driver of this disparity is the vastly different weightings of Nvidia (NVDA) in each ETF.
• SMH’s heavier allocation to NVDA, nearly 20%, significantly amplifies the impact of Nvidia’s 175%+ surge.
• Experts warn against solely focusing on short-term performance and emphasize the importance of diversification and risk management.
• Despite the current gap, both ETFs maintain strong long-term performance records.

The Nvidia Effect: A Weighting Game

On the surface, SMH and SOXX appear remarkably similar. Both track major U.S. semiconductor stocks, utilize market-cap weighting, and charge the same expense ratio of 0.35%. However, subtle differences in their compositions have yielded dramatically different results in 2024. Roxanna Islam, head of sector and industry research at VettaFi, pinpoints the core issue: “They’re pretty similar on the surface…Why is SMH doing so much better than SOXX? I mean, the answer is Nvidia.“

SMH includes the top 25 U.S. semiconductor stocks, while SOXX tracks 30. Critically, SMH allocates significantly larger weightings to its largest holdings, a strategy that has paid off handsomely given Nvidia’s exceptional performance. While Nvidia constitutes about 20% of SMH’s portfolio, its presence in SOXX is far smaller, amounting to less than 8%, according to Morningstar data. This difference in weighting is the key factor driving the massive performance discrepancy. “It does come down to that one is more top-heavy over the other,” Islam explains. In SOXX, Nvidia is not even the largest holding, trailing behind Broadcom (AVGO) despite Nvidia’s superior year-to-date performance.

Analyzing Nvidia’s Impact:

Nvidia’s phenomenal 175% year-to-date surge, making it a top performer in both the Dow Jones Industrial Average and a top three gainer in the S&P 500, has directly translated into substantial gains for SMH. This underscores the potentially massive impact of concentrated holdings within an ETF, especially when a single stock experiences such dramatic growth.

An Anomaly or a New Normal?

While the current gap is striking, Islam cautions against reading too much into the 2024 performance alone. She highlights the strengths of both ETFs, emphasizing that investors should consider both their short-term and long-term potential. SMH benefits from its larger size and higher liquidity, making it easier to trade. SOXX, on the other hand, offers greater diversification with its larger number of holdings and lower average-weighted market cap. Its early launch—around a decade earlier—also granted it a first-mover advantage.

Despite the 2024 divergence, both ETFs consistently rank within the top 5% of technology funds based on trailing 10-year returns, according to Morningstar. This demonstrates their long-term track records and resilience. Islam doesn’t anticipate such a wide gap persisting in 2025, advising investors against abandoning SOXX based solely on this year’s performance. Conversely, she underlines the inherent risk associated with SMH’s heavy concentration in a few stocks, including its prominent exposure to Nvidia.

The Risk of Concentrated Holdings:

The recent cooling of Nvidia’s performance, with a near 1% decline in December while both ETFs show positive returns, illustrates the vulnerability inherent in heavily weighted portfolios. Islam poses a thought-provoking question: “Some people say: Why not just buy Nvidia? Why even buy the ETF if it’s so focused on a single stock?…Nvidia is doing well this year. But what if it comes down next year?” This emphasizes the importance of diversification and the necessity to consider potential downsides when evaluating investment strategies.

Conclusion: A Balanced Perspective

The dramatic outperformance of VanEck SMH over iShares SOXX this year serves as a compelling case study in the importance of understanding ETF composition and weighting. While Nvidia’s remarkable growth has substantially boosted SMH’s returns, it also highlights the risks associated with concentrated portfolios. Investors should carefully weigh the benefits of higher potential gains against the increased risk of concentrated holdings. The long-term performance of both ETFs suggests that both provide solid investment options for those interested in the semiconductor sector, but understanding their differences in approach remains crucial for informed decision-making.

Ultimately, the choice between SMH and SOXX depends on individual investor risk tolerance and investment goals. Some may prefer the potentially higher gains and higher liquidity of SMH, while others might favor the greater diversification and lower risk of SOXX. Thorough research and a clear understanding of the underlying holdings and weighting strategies are essential before committing to either ETF.

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