Cracking the Code: The Mystery of SMH Outperforming SOXX in Semiconductor ETFs
In the world of exchange-traded funds (ETFs), the performance of semiconductor-related funds often reflects the underlying health and trends in the tech sector. Two prominent semiconductor ETFs, the iShares PHLX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH), have been closely monitored by investors and analysts alike for their performance during times of market volatility and growth.
The performance disparity between SOXX and SMH during various market conditions has piqued the interest of industry observers. While both ETFs are designed to track the performance of semiconductor companies, their underlying holdings and weighting methodologies differ significantly, leading to varying levels of resilience in the face of market challenges.
SOXX, managed by iShares, tracks the performance of the PHLX SOX Semiconductor Sector Index, which includes major semiconductor companies such as NVIDIA, Intel, and Applied Materials. On the other hand, SMH, managed by VanEck Vectors, follows the MVIS US Listed Semiconductor 25 Index, encompassing companies like Taiwan Semiconductor Manufacturing, Intel, and Broadcom.
One of the key reasons behind SMH holding up better than SOXX can be attributed to its focus on a more diverse set of semiconductor companies. SMH’s index includes companies that derive a substantial portion of their revenue from industries beyond semiconductors, such as advanced manufacturing or hardware technology, which can provide a buffer against market volatility specific to the semiconductor industry.
Moreover, SMH has a more balanced allocation across its top holdings compared to SOXX. This diversification helps SMH mitigate downside risks associated with idiosyncratic factors affecting any single semiconductor company, ultimately contributing to its relative outperformance compared to SOXX during turbulent market conditions.
Additionally, SMH’s eligibility criteria for inclusion in the ETF may have played a role in its resilience. The MVIS US Listed Semiconductor 25 Index selects companies based on market capitalization, liquidity, and trading activity, ensuring a more stable and robust set of constituents compared to the PHLX SOX Semiconductor Sector Index, which may be subject to more frequent changes in its holdings.
In conclusion, while both SOXX and SMH are designed to track the semiconductor industry’s performance, differences in their underlying holdings, weighting methodologies, and eligibility criteria can lead to varying levels of resilience during market fluctuations. SMH’s focus on a diversified set of semiconductor companies and more balanced allocation across its holdings have positioned it to weather market challenges better than SOXX, showcasing the importance of considering these factors when evaluating ETF investments in the semiconductor sector. Investors looking for exposure to the semiconductor industry may find SMH to be a more stable and reliable option based on its track record of outperformance and risk management strategies.