SMH ETF

For much of the past two years, the Semiconductors sector has lead the Nasdaq and S&P 500 higher. Lead by Nvidia, the Semiconductors have been a market force displaying strong leadership for tech stocks.

I rate the VanEck Semiconductor ETF (SMH) as a Hold due to concentration risk, high valuation, and technical analysis suggesting near-term downside momentum. SMH has a high P/E ratio of 60x, indicating stretched valuations, making it a poor capital allocation choice at this time. Geopolitical risks, including potential tariffs and tighter controls on semiconductor exports, could negatively impact SMH's holdings and profitability.

Launched on 12/20/2011, the VanEck Semiconductor ETF (SMH) is a passively managed exchange traded fund designed to provide a broad exposure to the Technology - Semiconductors segment of the equity market.

This ETF has long outperformed the S&P 500.

SMH's painful pullback in July/ August 2024 has occurred as expected, with the ETF nearly losing a quarter of its value then. Even so, the durability of generative AI demand across AI accelerators/ SaaS remains undisputed - as similarly reported by numerous market leading players. With the stock market entering the Q3'24 season, readers may expect more volatility as AMD continues to be downgraded and NVDA faces tougher YoY comparisons.

The recent stock market rally has seen the S&P 500 Index and Dow Jones Industrial Average make new highs but not the Nasdaq Composite. By itself, this is somewhat worrisome for tech investors.

Automation of 60%-70% of employee activities will drive significant productivity gains, supported by substantial investments from large technology companies. ETFs reduce company-specific risks, but currently, VanEck lacks a margin of safety despite its diversification benefits. Hold rating is justified by the promising sector outlook but tempered by current risk levels and lack of safety margin.

VanEck Semiconductor ETF's fundamentals remain strong, supported by Nvidia's resurgence and the AI growth thesis. The SMH ETF's leading stocks, including Nvidia, Intel, Broadcom, and AMD, are exposed to the secular AI growth inflection. SMH's valuation isn't expensive when adjusted for its growth prospects.

The semiconductor sector, long a leader in market performance, has faced headwinds in recent months. After an impressive run last year and through much of 2024, the industry took a sharp hit in July as expectations for a Federal Reserve rate cut grew, and the now infamous Japan carry trade unwind played out.