Financial experts often emphasize the importance of investing. However, many Americans are not knowledgeable about individual stocks, and some are afraid of investing in them in general.
To mitigate this, investment managers will often put their clients' money into exchange-traded funds (ETFs). These funds, which comprise numerous individual stocks, often balance the need for safety with the potential to earn higher returns than you would earn in banks or fixed-income instruments.
Also, many investing novices likely want to profit from artificial intelligence (AI). Still, rather than buying individual chip stocks like Nvidia, some may want to invest in a cross section of the semiconductor industry by buying the VanEck Semiconductor ETF (SMH 3.22%), and here's why.
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Understanding the VanEck ETF
The VanEck Semiconductor ETF has existed since 2011 and invests almost all of its capital in 26 chip stocks. This makes it riskier than an S&P 500 fund, which includes 500 companies across numerous industries.
Nonetheless, tech-focused investors willing to take on the increased risk will likely be pleased by what they see in the VanEck ETF. Around 20% of the fund is in Nvidia, and it invests just under 11% of its assets in Taiwan Semiconductor.
The other 24 holdings each make up less than 10%, though they are some of the most recognized names in the industry. Broadcom, ASML, Micron, and AMD are among its top holdings.
Moreover, the fund is an excellent compromise between earnings returns and managing risk. You're unlikely to see returns comparable to the 1,500% gain in Nvidia since the fall of 2022. Still, the fund helps offset underperformers like On Semiconductor, which lost ground over the same time frame.
Fund costs and returns
Also, because this is an ETF, it comes with an expense ratio, which covers the cost of managing the fund.
The VanEck fund has an expense ratio of 0.35%, meaning fundholders pay $35 in management fees for every $10,000 held in the fund. Considering that the average expense ratio is 0.44% for actively managed funds, its shareholders are arguably getting a bargain.
Investors are unlikely to complain about that expense ratio given the returns. Over the last 10 years, the fund's returns have averaged almost 31% per year. This is far ahead of the Nasdaq-100 tracker, the Invesco QQQ Trust, which delivered average returns of just over 19% annually during the same time frame.
NASDAQ: SMH
Key Data Points
Investors will still need a long-term perspective because these are average returns. They should note that the VanEck ETF lost 34% of its value in 2022. This occurred as the bear market in 2022 wiped out much of the pandemic-driven gains over the previous two years.
Fortunately, the VanEck fund has experienced more years of positive returns than losses. Thus, gains like the 49% increase in 2025 should more than offset periods with losses. If investors stay in the fund for several years, they are likely to earn positive returns and stand a high probability of continuing to outperform the Nasdaq.
Investing in the VanEck Semiconductor ETF
Ultimately, the VanEck Semiconductor ETF offers the potential to earn market-beating returns in a way that manages risk and limits the potential for losses.
Investors who buy the VanEck ETF need to take on more risk than S&P 500 or Nasdaq index investors. They will also need to hold the fund for several years to account for the occasional years of negative returns.
Nonetheless, the VanEck ETF offers investors a way to invest in the top semiconductor stocks with fewer risks, and the 0.35% expense ratio is arguably a bargain given the returns it has delivered for its shareholders.
