The VanEck Semiconductor ETF (SMH) is trading near all-time highs, propelled by relentless demand for artificial intelligence chips. On Tuesday, the fund reached $520.28, just shy of its intraday record of $522.38, marking a $13.49 gain from the prior close. This surge outpaces the broader market, with the SPDR S&P 500 ETF (SPY) rising only $4.71.
AI-Driven Performance
SMH has become a prime vehicle for investors seeking exposure to the hardware underpinning AI, including data processing and generative AI tasks. VanEck reports the fund's net asset value has soared 40.69% year-to-date and an impressive 140.37% over the past year through May 4. Total net assets now stand at $59.12 billion.
April saw SMH jump 32.2%, according to S&P Global Market Intelligence, driven by a tentative U.S.-Iran ceasefire and strong chipmaker earnings. The rally underscored semiconductors' outperformance relative to most non-energy sectors, as earnings highlighted sustained AI-driven demand.
Concentration in Key Holdings
The fund's structure is a key factor in its sharp moves. As of May 4, SMH holds 26 stocks, but nearly half its portfolio is concentrated in just five: Nvidia (16.91%), Taiwan Semiconductor Manufacturing Co. (TSMC) (10.64%), Broadcom (7.93%), Intel (7.12%), and Advanced Micro Devices (5.95%). This concentration means that the performance of a few stocks can significantly sway the entire ETF.
Intel, a major SMH holding, surged $13.72 to $109.50 following reports of talks with Apple about producing its primary device chips. However, Apple has not placed orders and remains cautious about moving away from TSMC due to scale and reliability concerns.
Earnings Momentum
TSMC reported first-quarter revenue of $35.90 billion, up 40.6% year-over-year, with net income and diluted EPS climbing 58.3%. CFO Wendell Huang attributed the quarter to strong demand for leading-edge process technologies. The company raised its full-year revenue forecast and increased capital expenditures to meet surging orders for high-end AI chips. CEO C.C. Wei described AI-related demand as extremely robust, with Quilter Cheviot's Ben Barringer noting TSMC's plants are running hot.
SEMI CEO Ajit Manocha told Reuters that worldwide chip demand looks solid for this year, despite supply hiccups and geopolitical tensions. Raw-material shortages, including helium and bromine, could pose future challenges. This year is probably in the bag, he added.
Valuation and Risk
24/7 Wall St. highlighted that SMH has surged about 2,041% over the past decade, far outpacing SPY's 249.56% gain. However, the recent run-up has attracted buyers at higher prices, raising valuation concerns. The fund's concentration risk means that Nvidia's results alone can cause significant swings. Semiconductors are cyclical, and any slowdown in AI data-center investments or worsening supply issues could reverse gains.
Investors remain bullish on AI hardware, viewing it as a straightforward growth story. LPL Financial's Jeff Buchbinder noted that AI-driven spending will likely continue driving S&P 500 earnings, especially in tech. Appetite for SMH stays strong, but there is little tolerance for disappointment.
