Semiconductor Stronghold: Competitive Advantages Create Collective Success
14 March 2024
Read Time 3 MIN
Semiconductors stand at the forefront of modern technology, driving the functionality of electronic devices across various industries. These tiny components play a vital role in powering everything from smartphones to cloud computing servers to artificial intelligence (AI).
The continued adoption of digital technologies across various sectors, including healthcare, automotive, consumer electronics, and industrial automation, is expected to drive demand for semiconductors moving forward. As we continue to ride the wave of technological advancement, semiconductors and artificial intelligence might still stand at the forefront of this evolution. Together, they drive each other's growth, propelling us into an unprecedented era of technological revolution. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade.
Semiconductors Come with Wide Moats
Morningstar's approach to assessing economic moats provides valuable insight into the semiconductor landscape. Economic moats are sustainable competitive advantages that are expected to allow companies to fend off competition and sustain profitability into the future. Wide moat companies in the semiconductor space include those specializing in peripheral chips, chip equipment, and graphics processors. These companies demonstrate strong competitive positions and are likely to maintain their market dominance for decades.
SMH ETF "Moat" Exposures
Strong Competitive Advantages in SMH’s Two Largest Holdings1
- NVIDIA (NVDA) – Moat Rating: Wide: Nvidia's competitive advantage in the GPU market stems from its pioneering role in graphics processing technology, continuous innovation, and deep expertise in parallel computing. The company enjoys a wide economic moat due to its extensive portfolio of patents, cutting-edge research and development, and strong ecosystem of software and developer tools, which have solidified its dominance in gaming, professional visualization, and, notably, the burgeoning field of artificial intelligence. Nvidia's GPUs are highly preferred for deep learning and AI applications, creating a virtuous cycle where increased usage in AI drives demand for its products, further entrenching its market leadership. This advantage is compounded by high barriers to entry in the GPU market, including significant capital expenditure and technological know-how, deterring potential competitors and securing Nvidia's position at the forefront of the industry.
Intangible Assets
Switching Costs
- Taiwan Semiconductor Manufacturing Company Limited (TSM) – Moat Rating: Wide: TSM enjoys a significant competitive advantage due to its advanced technological capabilities, scale, and efficiency in producing logic chips. As the world’s largest outsourced semiconductor foundry for logic chips, the company’s services are irreplaceable for customers that include vertically integrated original-equipment manufacturers and fabless semiconductor companies. TSM's wide economic moat is further bolstered by the substantial capital investment and technical expertise required to compete in this space, creating high barriers to entry. Moreover, the company's focus on research and development, coupled with its reputation for reliability, quality, and timely delivery, cements its critical position in the global semiconductor supply chain, making it indispensable to industry leaders and maintaining its market dominance.
Cost Advantage
Intangible Assets
Accessing a Team of Winners?
The VanEck Semiconductor UCITS ETF (SMH) might be an attractive way for investors to access the growth potential of semiconductor companies. Rather than attempting to pick individual stock winners in the ever-evolving semiconductor sector, SMH provides exposure to the currently top 25 most liquid U.S.-listed semiconductor companies, spanning the entire industry value chain from chip design and fabrication to manufacturing machinery.
SMH holds a broad array of companies, each a leader within the semiconductor ecosystem with its own economic moat and specialized niche, from AI players to hardware. This combination allows to face low competition with each other because the top players “win together” and collectively benefit as demand for semiconductors grows.
| VanEck Semiconductor ETF (SMH) Holdings as of 26/02/2024 | |||
| Name | Portfolio Weight % | Economic Moat2 | |
| NVIDIA Corp | 13.09% | Wide | |
| Broadcom Inc | 10.84% | Wide | |
| ASML Holding NV ADR | 10.35% | Wide | |
| Taiwan Semiconductor Manufacturing Co | 9.90% | Narrow | |
| Advanced Micro Devices Inc | 9.63% | Wide | |
| Intel Corp | 5.55% | Wide | |
| Qualcomm Inc | 5.31% | Wide | |
| Applied Materials Inc | 4.72% | Narrow | |
| Texas Instruments Inc | 4.54% | None | |
| Lam Research Corp | 3.78% | Wide | |
| Analog Devices Inc | 2.91% | Wide | |
| KLA Corp | 2.80% | Wide | |
| Micron Technology Inc | 2.75% | None | |
| Synopsys Inc | 2.70% | Narrow | |
| Cadence Design Systems Inc | 2.44% | Narrow | |
| NXP Semiconductors NV | 1.71% | Narrow | |
| Marvell Technology Inc | 1.44% | Narrow | |
| Microchip Technology Inc | 1.33% | Wide | |
| STMicroelectronics NV ADR | 0.89% | Narrow | |
| Monolithic Power Systems Inc | 0.85% | Wide | |
| ON Semiconductor Corp | 0.83% | Narrow | |
| Entegris Inc | 0.51% | Narrow | |
| Skyworks Solutions Inc | 0.49% | Wide | |
| Teradyne Inc | 0.39% | None | |
| Universal Display Corp | 0.23% | Not Covered | |
| Us Dollar | 0.01% | 0.00 | |
Before investing, please consider risk factors of a Semiconductor ETF: industry or sector concentration risk , equity market risk and risk of investing in the IT industry. Please refer to the fund’s KID and the Prospectus for other important information before investing.
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1 NVDA and TSM are shown because they are the top two holdings of SMH by weight as of 26/02/24.
2 Source: Morningstar.
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This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions.
This is a marketing communication for professional investors only. Please refer to the UCITS prospectus and to the Key Investor Information Document (KIID) before making any final investment decisions. This information originates from VanEck Securities UK Limited (FRN: 1002854), an Appointed Representative of Sturgeon Ventures LLP (FRN: 452811) which is authorised and regulated by the Financial Conduct Authority in the UK. The information is intended only to provide general and preliminary information to FCA regulated firms such as Independent Financial Advisors (IFAs) and Wealth Managers. Retail clients should not rely on any of the information provided and should seek assistance from an IFA for all investment guidance and advice. VanEck Securities UK Limited and its associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.
All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.
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