It takes time to pick stocks, and you could be wrong. But handing your money to a directed mutual fund, so someone else can pick stocks, will cost you big money in management fees.
The solution is an exchange-traded fund, or ETF, which is a mutual fund working passively in a specific industry sector. It will have low fees, and it trades directly on a stock exchange, so you can sell out quickly if you need to.
One of the best ETFs of this bull market is the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH).
SMH shares recently passed the high achieved in the dot-com bubble, opening for trade on Jan. 3 at $100.37 per share. Five years ago, it was trading in the low $30’s per share. Investors have tripled their money in that time, without having to worry about the ups and downs of individual stocks.
How the SMH ETF Works
SMH buys and holds a basket of semiconductor stocks. The risk is that you have losers in there as well as winners. The good news is you have winners along with the losers.
SMH has a lot of winners. Its biggest holdings are in two chip manufacturers, Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE:TSM) and Intel Corporation (NASDAQ:INTC). Each represents over 10% of the portfolio. It also owns big holdings in Applied Materials Inc. (NASDAQ:AMAT) and LAM Research Corp. (NASDAQ:LRCX), which make chip-making equipment.
Its biggest winners, however, are chip designers which don’t own fabrication plants, specifically Nvidia Corporation (NASDAQ:NVDA), Qualcomm Inc. (NASDAQ:QCOM) and Broadcom Ltd. (NASDAQ:AVGO). The fund seeks to replicate the Semiconductor 25 Index, which tracks stocks with a lot of shares involved in semiconductors and semiconductor equipment.
SMH is thus a passive fund. It’s not trying to find winners and dump losers for gains. It’s trying to mirror a specific industry, in this case semiconductors and equipment. Its managers will always “stay in their lane” — they won’t take a flyer on anything outside the group, and they won’t jump in with both feet on a move in any one stock.
Why SMH Works
An ETF like SMH is a good move for an investor with a long-term horizon who wants to track the market. It is sold by brokers and fund managers as part of a basket of ETFs to give broad market coverage.
SMH is also good for young investors who may not have the money, or the time, to buy and understand more than one or two stocks. You can cover a lot of market territory with just a few shares of SMH, or the other technology ETFs covered by our Todd Shriber last month.
You can follow the stocks covered under SMH in a loose way by seeking out news on the semiconductor industry, which is booming, with sales up over 20% year-over-year. During just the last year, SMH is up from $72, a gain of over 39%. Thus, as an SMH investor, you can see you are getting full bang for your buck.
The Bottom Line
In 2018, SMH is expected to continue gaining on demand for mobile phones, artificial intelligence applications and cloud computing. The industry is also expecting to benefit from the tax cut, and a continuing wave of mergers will also provide some lift.
The bottom line is that if you’re a young investor without a lot of cash, or if you like chips but don’t know which chip company looks best, you can get both profits and liquidity by picking up some shares of SMH right now. And that ease combined with the tailwinds for the sector mean SMH should do well in 2018.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.