SMH ETF

Chinese start-up DeepSeek trained and developed one of the most powerful AI models with inferior GPUs, for a very modest budget of less than $6M. This suggests that the Gen AI capex is likely to plummet as other companies follow the DeepSeek V3 innovation. SMH is heavily concentrated, with only 3 stocks accounting for 42% of the index, thus vulnerable for a sharp selloff as the Gen AI bubble continues to burst.

The S&P 500 index is about to finish a very successful year. Investing in the S&P 500 through an exchange-traded fund (ETF) is usually a wise choice, as it has historically provided an average annual return of 9% when dividends are reinvested, although some other funds may perform better. One of the top-performing ETFs in the past decade has been the VanEck Semiconductor ETF (NASDAQ: SMH), which has increased by around 800% during that period.

The S&P 500 index is set to cap off a banner year. Through Dec. 27, the broad market index is up 25% year to date, and Wall Street is calling for the bull run to continue into 2025 with the consensus estimates of 6,679, or up 12% as of Dec. 27.

Semiconductor names have been among the technology stars of 2024, with the VanEck Semiconductor ETF (SMH) higher by 43.60% year-to-date as of December 24. Impressive to be sure, but SMH's fabless counterpart — the VanEck Fabless Semiconductor ETF (SMHX) — could be an idea to consider in 2025.

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

VanEck Semiconductor ETF's valuation has become more reasonable since my last writing due to price correction and profitability improvement. The ETF's P/E ratio has contracted to 39.2x (vs. 45x at my last writing), aligning more favorably with the broader tech sector's valuation. Technical trading patterns indicate a consolidation phase, reducing the risk profile compared to the previous overbought status.

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.