Semiconductor Stronghold: Competitive Advantages Create Collective Success

14 March 2024

Read Time 3 MIN

The VanEck Semiconductor UCITS ETF (SMH), is comprised of the 25 largest and most liquid US-listed semiconductor stocks. Morningstar’s moat analysis reveals that the majority of these are the companies that are expected to maintain their competitive advantage in the future and could benefit from the surging demand for semiconductors, while keeping their margins intact.

Semiconductors stand at the forefront of modern technology, driving the functionality of electronic devices across various industries. These tiny components play a vital role in powering everything from smartphones to cloud computing servers to artificial intelligence (AI).

The continued adoption of digital technologies across various sectors, including healthcare, automotive, consumer electronics, and industrial automation, is expected to drive demand for semiconductors moving forward. As we continue to ride the wave of technological advancement, semiconductors and artificial intelligence might still stand at the forefront of this evolution. Together, they drive each other's growth, propelling us into an unprecedented era of technological revolution. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade.

Semiconductors Come with Wide Moats

Morningstar's approach to assessing economic moats provides valuable insight into the semiconductor landscape. Economic moats are sustainable competitive advantages that are expected to allow companies to fend off competition and sustain profitability into the future. Wide moat companies in the semiconductor space include those specializing in peripheral chips, chip equipment, and graphics processors. These companies demonstrate strong competitive positions and are likely to maintain their market dominance for decades.

SMH ETF "Moat" Exposures

Strong Competitive Advantages in SMH’s Two Largest Holdings1

  • NVIDIA (NVDA) – Moat Rating: Wide: Nvidia's competitive advantage in the GPU market stems from its pioneering role in graphics processing technology, continuous innovation, and deep expertise in parallel computing. The company enjoys a wide economic moat due to its extensive portfolio of patents, cutting-edge research and development, and strong ecosystem of software and developer tools, which have solidified its dominance in gaming, professional visualization, and, notably, the burgeoning field of artificial intelligence. Nvidia's GPUs are highly preferred for deep learning and AI applications, creating a virtuous cycle where increased usage in AI drives demand for its products, further entrenching its market leadership. This advantage is compounded by high barriers to entry in the GPU market, including significant capital expenditure and technological know-how, deterring potential competitors and securing Nvidia's position at the forefront of the industry.
    Intangible Assets

    Intangible Assets

    Switching Costs

    Switching Costs

  • Taiwan Semiconductor Manufacturing Company Limited (TSM) – Moat Rating: Wide: TSM enjoys a significant competitive advantage due to its advanced technological capabilities, scale, and efficiency in producing logic chips. As the world’s largest outsourced semiconductor foundry for logic chips, the company’s services are irreplaceable for customers that include vertically integrated original-equipment manufacturers and fabless semiconductor companies. TSM's wide economic moat is further bolstered by the substantial capital investment and technical expertise required to compete in this space, creating high barriers to entry. Moreover, the company's focus on research and development, coupled with its reputation for reliability, quality, and timely delivery, cements its critical position in the global semiconductor supply chain, making it indispensable to industry leaders and maintaining its market dominance.
    Cost Advantages

    Cost Advantage

    Intangible Assets

    Intangible Assets


Accessing a Team of Winners?

The VanEck Semiconductor UCITS ETF (SMH) might be an attractive way for investors to access the growth potential of semiconductor companies. Rather than attempting to pick individual stock winners in the ever-evolving semiconductor sector, SMH provides exposure to the currently top 25 most liquid U.S.-listed semiconductor companies, spanning the entire industry value chain from chip design and fabrication to manufacturing machinery.

SMH holds a broad array of companies, each a leader within the semiconductor ecosystem with its own economic moat and specialized niche, from AI players to hardware. This combination allows to face low competition with each other because the top players “win together” and collectively benefit as demand for semiconductors grows.

VanEck Semiconductor ETF (SMH) Holdings as of 26/02/2024
Name Portfolio Weight % Economic Moat2
NVIDIA Corp 13.09% Wide
Broadcom Inc 10.84% Wide
ASML Holding NV ADR 10.35% Wide
Taiwan Semiconductor Manufacturing Co 9.90% Narrow
Advanced Micro Devices Inc 9.63% Wide
Intel Corp 5.55% Wide
Qualcomm Inc 5.31% Wide
Applied Materials Inc 4.72% Narrow
Texas Instruments Inc 4.54% None
Lam Research Corp 3.78% Wide
Analog Devices Inc 2.91% Wide
KLA Corp 2.80% Wide
Micron Technology Inc 2.75% None
Synopsys Inc 2.70% Narrow
Cadence Design Systems Inc 2.44% Narrow
NXP Semiconductors NV 1.71% Narrow
Marvell Technology Inc 1.44% Narrow
Microchip Technology Inc 1.33% Wide
STMicroelectronics NV ADR 0.89% Narrow
Monolithic Power Systems Inc 0.85% Wide
ON Semiconductor Corp 0.83% Narrow
Entegris Inc 0.51% Narrow
Skyworks Solutions Inc 0.49% Wide
Teradyne Inc 0.39% None
Universal Display Corp 0.23% Not Covered
Us Dollar 0.01% 0.00

Before investing, please consider risk factors of a Semiconductor ETF: industry or sector concentration risk , equity market risk and risk of investing in the IT industry. Please refer to the fund’s KID and the Prospectus for other important information before investing.

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1 NVDA and TSM are shown because they are the top two holdings of SMH by weight as of 26/02/24.

2 Source: Morningstar.

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Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

All performance information is based on historical data and does not predict future returns. Investing is subject to risk, including the possible loss of principal.

No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

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