SMH vs. FTXL: A Data-Driven Comparison to Find the Best Semiconductor ETF for Investors

This report provides a comprehensive analysis of two prominent semiconductor ETFs: the VanEck Semiconductor ETF (SMH) and the First Trust Nasdaq Semiconductor ETF (FTXL). The analysis is based on performance metrics, expense ratios, portfolio composition, and market sentiment as of September 2024. The goal is to determine which ETF offers better investment prospects for those looking to gain exposure to the semiconductor sector. The report concludes with a concrete opinion based on the data and trends observed.

Introduction

Performance Metrics

SMH Performance

The VanEck Semiconductor ETF (SMH) has demonstrated robust performance over multiple time horizons. As of August 31, 2024, SMH’s performance metrics are as follows:

• 3-year annualized return: 22.5%
• 5-year annualized return: 34.8%
• 10-year annualized return: 26.6%

These figures indicate that SMH has consistently outperformed its peers, providing substantial returns to its investors. The ETF’s top holdings include a significant 20.1% position in Nvidia (NVDA), which has been a major driver of its performance.

FTXL Performance

The First Trust Nasdaq Semiconductor ETF (FTXL) has also shown positive returns, albeit not as impressive as SMH. As of August 31, 2024, FTXL’s performance metrics are:

• 3-year annualized return: 11.6%
• 5-year annualized return: 23.9%

FTXL was launched in 2016, so it does not have a 10-year track record. Its top holdings include an 8.3% position in Nvidia and an 8.6% position in Intel (INTC), the latter of which has seen a 30.4% decline over the past year. This has negatively impacted FTXL’s overall performance.

One-Year Performance

According to NerdWallet, the one-year performance of SMH is 56.48%, while FTXL has a one-year performance of 30.01%. This indicates that SMH has significantly outperformed FTXL over the past year by a margin of 26.47 percentage points.

Expense Ratios

Expense ratios are a critical factor for investors as they directly impact net returns. Lower expense ratios are generally more favorable as they reduce the cost of investment.

SMH Expense Ratio

SMH has an expense ratio of 0.35%, which is relatively low and competitive within the industry. This makes it an attractive option for cost-conscious investors.

FTXL Expense Ratio

FTXL has a higher expense ratio of 0.60%. While this is not exorbitantly high, it is significantly more than SMH’s expense ratio. Over time, this higher cost can erode returns, making FTXL less appealing from a cost perspective.

Portfolio Composition

The composition of an ETF’s portfolio can provide insights into its risk and return profile. A concentrated portfolio may offer higher returns but also comes with higher risk.

SMH Portfolio

SMH is top-heavy, with 71.5% of its assets in its top 10 stocks. Notably, it has a substantial 20.1% position in Nvidia and a 12.6% position in Taiwan Semiconductor Manufacturing. This concentration in high-performing stocks has been a significant driver of its superior returns.

FTXL Portfolio

FTXL is less concentrated, with 60.4% of its assets in its top 10 stocks. Its largest holdings include an 8.3% position in Nvidia and an 8.6% position in Intel. The decline in Intel’s stock has negatively impacted FTXL’s performance, highlighting the risks associated with its portfolio composition.

Market Sentiment and Analyst Ratings

Market sentiment and analyst ratings can provide additional context for evaluating an ETF’s future prospects.

SMH Market Sentiment

SMH has a consensus rating of “Strong Buy,” based on 21 Buys and 5 Holds. The price target implies about a 16% potential upside, indicating strong market confidence in its future performance.

FTXL Market Sentiment

FTXL has a consensus rating of “Moderate Buy,” based on 26 Buys and 6 Holds. The price target also implies about a 16% potential upside. However, the moderate rating suggests that analysts are less confident in FTXL’s future performance compared to SMH.

Comparative Analysis

Performance Comparison

When comparing the performance metrics, SMH clearly outperforms FTXL across all available time horizons. The 3-year, 5-year, and 10-year annualized returns for SMH are significantly higher than those for FTXL. Additionally, SMH’s one-year performance is 26.47 percentage points higher than FTXL’s, further solidifying its superior performance.

Cost Efficiency

SMH’s expense ratio of 0.35% is lower than FTXL’s 0.60%, making it a more cost-efficient option. Over time, the lower expense ratio can contribute to higher net returns for investors.

Portfolio Risk and Return

SMH’s top-heavy portfolio, with significant positions in high-performing stocks like Nvidia, has been a key driver of its superior returns. However, this concentration also introduces higher risk. In contrast, FTXL’s more diversified portfolio reduces risk but has not delivered comparable returns.

Market Sentiment

The “Strong Buy” consensus rating for SMH, coupled with a 16% potential upside, indicates strong market confidence. On the other hand, FTXL’s “Moderate Buy” rating suggests that analysts are less optimistic about its future performance.

Conclusion

Based on the comprehensive analysis of performance metrics, expense ratios, portfolio composition, and market sentiment, the VanEck Semiconductor ETF (SMH) emerges as the superior investment option compared to the First Trust Nasdaq Semiconductor ETF (FTXL). SMH’s consistent outperformance, lower expense ratio, and strong market sentiment make it the favored choice for investors seeking exposure to the semiconductor sector.