The VanEck Semiconductor ETF (SMH) has been one of the decade’s standout performers — delivering a 31.34% annualized return at net asset value over the trailing 10-year period ending March 31, 2026 — but that outperformance masks a growing concentration risk that investors increasingly need to consider. Nearly one-third of SMH is tied to just two companies, amplifying single-stock exposure inside what many assume is an industry-diversified vehicle.
SMH tracks the MVIS U.S. Listed Semiconductor 25 Index and has closely tracked its benchmark: the index returned 31.45% annualized over the same 10-year span, signaling minimal tracking error. Still, investors rode a volatile stretch of the semiconductor cycle, with sharp drawdowns and periods of unrealized losses even as long-term compounding produced eye-catching returns. The fund’s market-cap-weighted construction is central to both its results and its risks.
As of April 21, 2026, Nvidia (NVDA) comprised 18.57% of SMH and Taiwan Semiconductor Manufacturing Co. (TSMC) 10.63%, meaning the pair accounts for almost one-third of the ETF’s total weight. That concentration turns what many view as a broad industry bet into a more focused wager on a handful of dominant players. A single disappointing earnings report, regulatory development or supply-chain disruption at either company could move SMH several percentage points in a single session, underlining how index weighting can shift an ETF’s risk profile over time.
Investors seeking semiconductor exposure with less top-heavy risk have alternatives. The SPDR S&P Semiconductor ETF (XSD) uses an equal-weight methodology and holds about 44 semiconductor names; like SMH, it charges a 0.35% expense ratio. Equal-weighting prevents the largest firms from commanding outsized allocations at rebalance and creates a systematic trim-and-rebalance dynamic that can act like a buy-low, sell-high mechanism across cycles. Over the past decade XSD returned 22.62% annualized — strong, but notably below SMH’s gain — reflecting the outsized contribution from the sector’s largest winners.
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The divergence between SMH and XSD performance points to the trade-off investors face: in prolonged bull markets led by a few big winners, market-cap-weighted funds can outperform, but if leadership broadens or rotates, equal-weight funds can capture upside more evenly. That calculus is particularly relevant now as AI demand continues to reshape semiconductor markets. Some strategists have warned that the extraordinary momentum in a single name like Nvidia may be difficult to sustain indefinitely, even as they remain constructive on chips as a group — a backdrop that makes the question of concentration more than an academic one.
Practical considerations for portfolio construction include not only returns and methodology but also liquidity, turnover, and the size of single-stock exposures within ETFs. For SMH, the April 21 holdings snapshot underscores that a significant portion of returns over the past decade has been driven by a small subset of firms. Whether investors prefer concentrated exposure to potential future winners or a more diversified slice of the semiconductor industry depends on their outlook for leadership and their tolerance for idiosyncratic risk.
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SMH’s decade-long track record is striking, but its current composition makes it as much a bet on a few market leaders as it is on the semiconductor sector broadly. Comparing that profile with alternatives such as XSD helps clarify whether an ETF aligns with an investor’s forward-looking view of where the next phase of industry gains will come from.
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