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Semiconductor Stronghold: Competitive Advantages Create Collective Success

March 01, 2024

Read Time 3 MIN

The VanEck Semiconductor ETF (SMH) has assembled a “team of winners,” where companies bolstered by competitive advantages are poised to benefit from the surging demand for semiconductors.

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 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

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

    Intangible Assets

    Switching Costs

    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 Advantages

    Cost Advantage

    Intangible Assets

    Intangible Assets


Accessing a Team of Winners

We believe the VanEck Semiconductor ETF (SMH) is 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 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 diversification uniquely creates a "team of winners,” which 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 2/26/2024
Name Ticker Portfolio Weight % Economic Moat2
NVIDIA Corp NVDA 25.89% Wide
Taiwan Semiconductor Manufacturing Co Ltd ADR TSM 9.45% Wide
Broadcom Inc AVGO 5.93% Wide
Advanced Micro Devices Inc AMD 5.61% Narrow
ASML Holding NV ADR ASML 5.10% Wide
Applied Materials Inc AMAT 4.71% Wide
Lam Research Corp LRCX 4.53% Wide
Qualcomm Inc QCOM 4.05% Narrow
Intel Corp INTC 3.88% None
Texas Instruments Inc TXN 3.53% Wide
KLA Corp KLAC 3.52% Wide
Analog Devices Inc ADI 3.51% Wide
Micron Technology Inc MU 3.40% None
Synopsys Inc SNPS 3.39% Narrow
Cadence Design Systems Inc CDNS 3.05% Narrow
NXP Semiconductors NV NXPI 2.09% Narrow
Marvell Technology Inc MRVL 1.72% Narrow
Microchip Technology Inc MCHP 1.64% Wide
STMicroelectronics NV ADR STM 1.09% Narrow
Monolithic Power Systems Inc MPWR 1.07% Wide
ON Semiconductor Corp ON 1.02% Narrow
Skyworks Solutions Inc SWKS 0.61% Narrow
Teradyne Inc TER 0.48% Wide
Qorvo Inc QRVO 0.40% None
Universal Display Corp OLED 0.29% Not Covered

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IMPORTANT DISCLOSURES

1 NVDA and TSM are shown because they are the top two holdings of SMH by weight as of 2/26/24.

2 Source: Morningstar.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the Fund may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.

IMPORTANT DISCLOSURES

1 NVDA and TSM are shown because they are the top two holdings of SMH by weight as of 2/26/24.

2 Source: Morningstar.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the Fund may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.