ETFs
Forget the Nasdaq 100, buy this ETF instead
At first glance, it may seem unwise to speak negatively about Nasdaq100 and its correspondent exchange-traded fund (ETF)THE Invesco QQQ Trust (NASDAQ:QQQ). Considering that $100,000 invested 20 years ago would be worth about $1.3 million today, this obviously makes for a great investment vehicle.
However, one segment of technology stood out for its performance: semiconductors. Despite a relatively high level of volatility, chips have fueled the technology industry, significantly increasing technology returns. So, instead of investing in the Nasdaq 100 through the Invesco QQQ Trust, one might consider looking at a certain semiconductor ETF that could generate higher returns.
The Semiconductor ETF
This rapidly growing investment is the VanEck Semiconductor ETF (NASDAQ:SMH).
Certainly, the VanEck ETF carries a higher level of risk. With this fund, investors bet not only on technology, but also on a specific part of the technology industry. Additionally, instead of 100 stocks, the VanEck fund only holds 26 stocks.
In comparison, the Nasdaq 100 was 59% allocated to technology at the end of the first quarter of 2024. This index nevertheless holds stakes in 10 industrial sectors, a factor which provides some diversification.
Additionally, VanEck ETF shareholders pay an expense ratio of 0.35%, higher than Invesco QQQ’s 0.20%.
However, it is its managers who seem to receive the highest commissions. Over the past year, the fund has grown 72%. Additionally, by extending the timeline to 10 years, which includes downtime for the industry and the overall market, investors earned an average return of almost 27% per year. This exceeds the average return of the Invesco QQQ over the last 10 years of 19% per year.
|
One year |
Three years |
Five years |
10 years |
|
|
VanEck ETF |
72% |
24% |
35% |
27% |
|
Invesco QQQ |
39% |
12% |
21% |
19% |
Data sources: VanEck, Invesco.
Additionally, some of the higher returns could ironically be due to the cyclical nature of the semiconductor industry. Although investors are benefiting from significant upside in the chip industry, it is also known for heavy sell-offs during downtime. The selloffs are so severe that sometimes the Nasdaq 100 outperforms the VanEck fund.
Still, investors should remember that the chip industry has recovered from every past downturn. So, if we see a time where the Nasdaq 100 is outperforming the ETF over a one- or three-year period, that’s probably one of the best times to add shares of the VanEck fund.
SMH Total Return Levels Chart
Stock investments of the VanEck ETF
The VanEck Semiconductor ETF also earned its returns by making large but calculated bets on specific semiconductor stocks.
The story continues
Unsurprisingly, its most important position is Nvidia, representing nearly 21% of the fund’s assets. Nvidia currently dominates the artificial intelligence (AI) chip market, helping it post triple-digit revenue growth in recent quarters. This likely generated a significant portion of its returns this year.
Furthermore, it assumes another type of risk with its 13% stake in Taiwan Semiconductor. As a dominant maker of high-end chips, it hasn’t experienced the volatility of Nvidia. Additionally, as it is the most advanced chipmaker, it is well-positioned to thrive on AI.
The only other stock with a stake significantly above 5% is Broadcom, which represents just under 8% of the fund. The specialist business-to-business chip designer has benefited from strong demand for AI accelerators and networking products in AI data centers, helping its stock more than double over the past year. ‘last year.
The remaining 23 stocks represent positions of 5% or less in various sectors of the chip industry. This can range from chip design companies like Qualcomm to analog chip companies like Texas Instruments has ASML, a leader in equipment manufacturing. These encompass all major sub-segments of the semiconductor industry. Since the industry serves a wide range of needs and customers, it gives the fund more balance than one might assume.
Additionally, thanks to the sector’s strong performance over the years, these stocks have collectively made a significant contribution to the fund’s returns. As AI once again fuels demand for semiconductors, this dynamic is unlikely to change anytime soon.
Investing in the VanEck Semiconductor ETF
The VanEck Semiconductor ETF has outperformed index stocks like the Invesco QQQ due to calculated bets and secular growth in the chip industry.
Certainly, a fund with 26 stocks is riskier than a fund with 100, and betting exclusively on one sector could harm investors in the long term.
Nonetheless, the technology industry relies heavily on semiconductors, a factor that has led to outsized returns over long periods of time. While no investor should go all-in on semiconductors, the sector is too crucial not to participate. Ultimately, the VanEck Semiconductor ETF allows investors to benefit from this industry while mitigating its risks.
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Will Healy holds positions at Qualcomm. The Motley Fool holds positions and recommends ASML, Nvidia, Qualcomm, Taiwan Semiconductor Manufacturing and Texas Instruments. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.
Forget the Nasdaq 100, buy this ETF instead was originally published by The Motley Fool