Not all semiconductor ETFs are the same. What investors need to know before betting on Nvidia and other chip stocks.

By Isabel Wang

Different weighting schemes for chip ETFs could result in varying returns for investors, say analysts

Hello! This is MarketWatch reporter Isabel Wang bringing you this week's ETF Wrap. In this edition, we look at semiconductor exchange-traded funds as Nvidia's stock has turbocharged chip ETFs to become market leaders in the first half of 2024.

Please send tips or feedback to isabel.wang@marketwatch.com or to christine.idzelis@marketwatch.com. You can also follow me on X at @Isabelxwang and Christine at @CIdzelis.

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Semiconductor ETFs have been among the top-performing U.S.-listed funds so far in 2024 as Nvidia (NVDA) has leapfrogged Microsoft (MSFT) and Apple (AAPL) to become the most valuable public company in the world, following months of a seemingly unstoppable rally driven by soaring demand for its chips and the frenzy over artificial intelligence.

But a closer examination of their performance in the first half of the year reveals that some of the most popular ETFs that track the chip industry haven't kept pace, creating significant gaps in their year-to-date returns.

The VanEck Semiconductor ETF SMH, the largest ETF in the chip industry with nearly $24 billion assets under management, has advanced nearly 55% this year. It was the second-best performer among over 900 ETFs that MarketWatch tracked in the same period, according to FactSet data.

The iShares Semiconductor ETF SOXX and the Invesco Semiconductor ETF PSI were also among the top 10 best-performing funds in the first half of 2024, up 35% and 31%, respectively, but they have lagged SMH by over 20 percentage points year to date, according to FactSet data.

The SPDR S&P Semiconductor ETF XSD, with over $1 billion in assets under management, has surged a mere 10.7% so far in 2024, underperforming SMH by 45 percentage points, according to FactSet data (see chart below).

"One thing when you look at semiconductor ETFs is that there's a huge difference in the way they weigh the stocks - some of them use cap weighting and some of them use equal weighting, so depending on which one you use you can end up with very different results," said Aniket Ullal, head of ETF data and analytics at CFRA Research. He said that historically the funds that have had higher exposure to Nvidia have been the best-performing ETFs in the chip industry.

All these semiconductor ETFs are passively managed and are comprised of a similar batch of chip stocks, but the different weighting schemes could result in varying returns for investors, analysts said.

Most of them count Nvidia stock, which has jumped 167% so far in 2024, as their largest holding, followed by other chip performers such as Broadcom Inc. (AVGO), Advanced Micro Devices Inc. (AMD) and Micron Technology (MU), according to FactSet data.

The market-cap weighted SMH has a massive Nvidia position. In fact, it makes up over one-quarter of its assets, with a weighting of 25.1% as of Thursday, compared with the modified market-cap weighted SOXX's 11.5% Nvidia weighting and the equal-weighted XSD's 3.9% Nvidia weighting.

See: Technology stocks are once again leading the way in 2024. Why these ETFs tell a different story.

MarketWatch reported last month that some of the passively-managed ETFs use what's called a modified market-cap weighting to promote portfolio weight diversification and to limit the influence of some of the largest stocks in an ETF. That also prevents the fund issuers from breaching the UCITS regulations or U.S. regulated investment company's asset-diversification requirements.

Martijn Rozemuller, chief executive of VanEck Europe, said such rules "will definitely limit the top holdings, which on one hand is a good thing because it means that without it, probably Nvidia would be half of the [ETF] basket, which would have worked quite well from a performance perspective but it would have made the product a lot more risky towards one specific name," he told MarketWatch in an interview on Thursday.

Meanwhile, an equal-weighted fund like XSD usually offers more protection if a large component like Nvidia experiences a downturn, and due to the equal weighting, other smaller companies underperforming may offset losses more than they would in a market-cap weighted fund.

SMH tumbled 2.8% on Thursday as Nvidia turned sharply lower after reaching a new high earlier in the session, while XSD was off 2.2%, according to FactSet data.

Ullal said investors need to think about "how much exposure they want Nvidia to have in their portfolio" before betting on the entire semiconductor industry. "You can actually calibrate your exposure in Nvidia, depending on which ETF you select," he told MarketWatch via phone on Thursday.

But if investors think it's time for the AI story to "spread" to other chip makers who could compete with Nvidia's growth, the performance gap between the semiconductor ETFs "may go down," or investors may actually prefer the equal-weighted fund like XSD, Ullal said.

"Just because historically, the market-cap weighted semiconductor ETF has outperformed, it doesn't mean that it will necessarily do that in the future. The difference [in ETF returns] could narrow as other chip makers start competing with Nvidia," Ullal added.

As usual, here's your look at the top- and bottom-performing ETFs over the past week through Tuesday, according to FactSet data, as markets were closed in observance of Juneteenth on Wednesday.

The good ...

   Top performers                                                                                                                                                                             %Performance 
   United States Oil Fund LP                                                                                                                                                                  3.9 
   VanEck Semiconductor ETF                                                                                                                                                                   3.6 
   YieldMax NVDA Option Income Strategy ETF                                                                                                                                                   3.4 
   iShares MSCI Taiwan ETF                                                                                                                                                                    3.4 
   First Trust Nasdaq Semiconductor ETF                                                                                                                                                       2.9 
   Source: Source: FactSet data through Tuesday, June 18. Start date June 13. Excludes ETNs and leveraged products. Includes NYSE-, Nasdaq- and Cboe-traded ETFs of $500 million or greater. 

... and the bad

   Bottom performers                                       %Performance 
   ARK Genomic Revolution ETF                              -4.9 
   First Trust Nasdaq Clean Edge Green Energy Index Fund   -4.5 
   SPDR S&P Biotech ETF                                    -4.4 
   Invesco Solar ETF                                       -4.3 
   ProShares Bitcoin Strategy ETF                          -3.6 
   Source: FactSet data 

New ETFs

Calamos Investments LLC on Monday announced the expansion of its Structured Protection ETF lineup with the July 1 launch of Calamos S&P 500 Structured Alt Protection ETF - July, which could provide 100% downside protected S&P 500 exposure over a one-year outcome period. The move is to respond to investor demand following the debut of CPSM, Calamos' first Structured Protection ETFs CPSM launched May 1, according to the press release.

Weekly ETF Reads

BlackRock launches more active ETFs, ramps up lineup amid 'tremendous' demand (MarketWatch) Popular tech ETF forced to dump Apple stock, buy Nvidia in upcoming rebalancing (MarketWatch) ETFs could seize half of current US mutual fund assets, says Citi (Financial Times) Retail Funds Dive Into Quant-Factor ETFs After $48 Billion Haul (Bloomberg) An ETF to play gold, silver, copper and everything in between (Fox Business)ETFs of Closed-End Funds: Unexpected Growth Opportunities (ETF Trends)

-Isabel Wang

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06-20-24 1700ET

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