The Big Performance Gap Shows Why You Might Want to Check Your Semiconductor ETF Holdings

Two of the most prominent exchange-traded funds (ETFs) tracking U.S. semiconductor stocks are charting dramatically different courses this year, breaking from their history of relatively aligned performance.

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The VanEck Semiconductor ETF (SMH) has surged approximately 42% in 2024, while the iShares Semiconductor ETF (SOXX) lags behind with a gain of just 15%. This performance gap of over 26 percentage points is the largest recorded in more than a decade, according to a CNBC analysis.

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The difference in returns is notable because it places the VanEck fund on track to outperform both the broader S&P 500 and the tech-heavy Nasdaq Composite. Conversely, the iShares ETF, despite its coverage of the highly innovative semiconductor sector, is poised to underperform these major indexes.

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This divergence began to surface in 2023, when the VanEck fund outpaced its iShares counterpart by nearly 7 percentage points. Historically, the two ETFs performed within a few percentage points of each other, alternating leadership from year to year. However, the widening gap in 2024 has left some retail investors puzzled about the distinctions between these two popular funds.

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According to Roxanna Islam, head of sector and industry research at VettaFi, the answer lies in the different weightings of Nvidia, the AI-driven chipmaker that has experienced phenomenal growth this year.

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“They’re pretty similar on the surface,” Islam explained. “Why is SMH doing so much better than SOXX? The answer is Nvidia.”

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While both ETFs track indexes in the same industry and use market-cap-weighted methodologies, the VanEck SMH ETF focuses on the 25 largest U.S. semiconductor stocks, whereas the iShares SOXX ETF includes 30. Importantly, the VanEck fund allocates significantly more weight to its top holdings.

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This weighting difference has played a critical role, especially given Nvidia’s meteoric rise of over 175% this year. As one of the top performers in the Dow Jones Industrial Average and the S&P 500, Nvidia’s exceptional gains have provided a substantial boost to funds with higher exposure to the stock.

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The VanEck ETF allocates nearly 20% of its portfolio to Nvidia, compared to less than 8% for the iShares fund, per Morningstar data. Additionally, Nvidia is not even the largest holding in the SOXX ETF, trailing Broadcom despite Nvidia’s superior performance this year.

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Islam highlighted that each fund has its own strengths and weaknesses. The VanEck SMH ETF is larger and offers greater liquidity, which can be advantageous for active traders. However, its heavy concentration in a few stocks, particularly Nvidia, makes it more susceptible to significant swings tied to individual names.

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The iShares SOXX ETF, on the other hand, has more diversified holdings and a smaller average-weighted market cap, offering broader exposure to the semiconductor sector. It also has a first-mover advantage, having launched nearly a decade earlier than its VanEck counterpart.

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Both funds remain within the top 5% of technology ETFs based on their trailing 10-year returns, according to Morningstar. Despite 2024’s divergence, Islam doesn’t anticipate such a pronounced gap between the two funds in 2025.

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While Nvidia’s exceptional performance has driven the VanEck ETF’s gains this year, Islam cautioned against relying too heavily on a single stock. Nvidia’s momentum has recently cooled, with the stock down nearly 1% in December, even as both ETFs posted gains for the month.

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“Some people ask: Why not just buy Nvidia instead of the ETF if it’s so dominant?” Islam noted. “Nvidia is doing well this year, but what happens if it underperforms next year?”

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The high concentration of the VanEck ETF makes it more sensitive to fluctuations in its top holdings, which could pose risks if Nvidia or other leading names experience a downturn.

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For now, the dramatic divergence in performance between these two semiconductor ETFs appears to be an anomaly rather than a new norm. Investors should weigh the benefits of VanEck’s liquidity and Nvidia-driven gains against the iShares fund’s diversification and longer track record.

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As the semiconductor sector continues to evolve, fueled by advances in artificial intelligence and other cutting-edge technologies, both ETFs remain strong options for investors seeking exposure to this dynamic industry. However, the 2024 divergence serves as a reminder that even funds tracking the same sector can produce vastly different results based on their methodologies and weighting strategies.

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