The best Semiconductor ETF to invest $1,000 in right now

This year has certainly been a wild ride for tech investors. Until July 10, Nasdaq Composite increased by over 26%. Buoyed by the investing world’s love affair with artificial intelligence (AI), stocks in the space have made an absolutely monstrous comeback. poster child, Nvidiait returned 180% in the same time frame.

Nvidia is a semiconductor company, that is, it is involved in the creation of computer chips. The hyper-advanced versions that Nvidia designs are the backbone of the AI ​​industry; without them AI as we know it would not be possible. That’s why it and other semiconductor companies are so valuable.

Since then, the market has cooled as investors weigh current valuations and the possibility of a not-so-soft landing for the economy in the near future. Despite this, the promise of AI remains. If you believe in his long-term thesis, now may be a perfect time to invest as the stock is down from its high just a month ago.

But where to put, say, $1,000? Instead of picking and choosing individual stocks — perfectly fine if done judiciously — you could opt for an exchange-traded fund (ETF). They are bought and sold the same way you would an individual stock. However, owning it provides exposure to a basket of companies at once. It’s a great way to quickly and easily diversify your holdings. There are all kinds of ETFs, but thematic ETFs are some of the most interesting, focusing on a specific sector or area of ​​the market, such as semiconductors. Let’s take a look at my favorite semiconductor ETF and an alternative.

This is the best performing semiconductor ETF this year and my top pick

This year’s best performer, by a fairly wide margin, is also the largest semiconductor ETF, the VanEck Semiconductor ETF (SMH 1.88%). The ETF has returned 40% this year so far. Much of that success comes from the ETF’s heavy weighting to Nvidia. More than 20% of the ETF is invested in the company. This chart shows the top five holdings; note the steep drop from no. 2 to no. 3.

Now, this has to do with the methodology of how VanEck chooses to invest its funds, or rather the methodology of the index that the ETF is designed to track. The fund is passively managed, meaning there is no fund manager actively trading assets at their own discretion. Instead, it mimics a specific index, in this case MVIS US Listed Semiconductor 25 Index (MVSMH), which tracks the 25 largest semiconductor companies that generate at least half of their revenue from semiconductors or semiconductor equipment. This index proved a winner for VanEck. Take a look at its returns over the past three years compared to two major competitors.

SMH data by YCharts

The ETF has consistently outperformed its rivals. Now, there is a management fee — that’s true for all ETFs — but it’s on the low side at just 0.35%, or $35 annually per $10,000 invested. That’s pretty cheap for ETFs. The main problem I have with this ETF is its concentration. It is heavily weighted to only a handful of companies. That’s part of the reason it’s returned more than some of its competitors, but it also carries more risk.

There are a few options such as iShares Semiconductor ETFwhich offers a bit more diversification. The iShares offering invests in 10 more companies, and the weighting is less concentrated at the top. Of course, this is only marginally less focused. These are highly targeted ETFs, after all. They are meant to be held as part of a broad and diverse portfolio.