VanEck Semiconductor ETF soars in 2023, but is the chip shortage over?

The VanEck Semiconductor ETF has soared 44% in 2023. Top holdings including Nvidia and Broadcom are experiencing strong growth, both as the chip sector recovers from recent supply chain issues, and as AI drives demand. However, some analysts remain bearish on the global semiconductor market’s immediate recovery.

• The VanEck Semiconductor ETF has risen by 44% this year.
•  Top holding Nvidia rockets nearly 170% year-to-date, driven by AI forecast.
• Analysts foresee global chip market decline by up to 22% in 2023.

The VanEck Semiconductor ETF [SMH] has soared by 44% since the start of the year to 2 June, and is down 1.3% in the past week.

The ETF was founded in December 2011 and tracks the performance of companies involved in semiconductor production and equipment, and which feature in the MVIS US Listed Semiconductor 25 Index.

While semiconductors drive much technology in the modern world, only a relatively small number of companies are involved in their production.

SMH has enjoyed a strong performance so far in 2023, with the US chipmaker Nvidia [NVDA], the fund’s top holding as of 1 June, seeing especially rapid growth this year.

Semiconductors are central to the manufacturing of consumer electronics, including smartphones and laptops, as well as components in modern cars. While the sector was hit by a global chip shortage amid supply chain issues in 2021 and 2022, the surge in artificial intelligence (AI) innovation this year has renewed demand.

Top holding tops expectations

Nvidia makes up 17.58% of the fund’s portfolio value as of 1 June. The US chipmaker’s share price has rallied 169.1% year-to-date, though it is down 2% in the past week.

Nevertheless, last week Nvidia became the first chip stock to top $1trn market value, one week after the company soared past analyst expectations in its sales forecast, largely a result of demand spurred by AI.

While Nvidia designs chips, production is currently outsourced to companies, including the Taiwan Semiconductor Manufacturing Company (TSMC) [TSM], the second-largest holding in the VanEck Semiconductor ETF, accounting for 11.05% of assets under management (AUM). TSMC makes chips for Nvidia’s graphics processing units (GPUs) used by generative AI technology like ChatGPT, in addition to chips for Apple [AAPL] devices, including the iPhone. Year-to-date TSMC stock is up 33.5% and down 3% in the past week.

The third-largest holding in the VanEck fund is Advanced Micro Devices [AMD], with a 5.88% share of AUM. The GPU-maker is up 82% in the year to date and down 5.9% in the past week. Like its rivals, AMD is tipped to benefit from the wave of new AI technology. Srini Pajjuri, managing director and senior analyst at Raymond James, said in March the stock was “underappreciated”.

Outlook

Despite nearly tripling in value so far in 2023, Wall Street experts believe top-holding Nvidia has further room to grow, which would be good news for the VanEck Semiconductor ETF’s outlook.

Of 49 analysts polled by Refinitiv, 15 give a ‘buy’ rating on NVDA stock, 25 say it will ‘outperform’ and nine say to ‘hold’.

However, the sector may not be out of the woods yet, according to an April paper from J.P. Morgan, which questioned whether the chip shortage was really over. It concluded that shortages “could remain through 2023 and into 2024”, but that supplies of semiconductors and raw materials were set to improve within the automotive sector.

In May, tech research and consulting firm Gartner said it predicts an 11% shrinkage within the semiconductor sector this year, slightly more positive than the 22% decline that Malcolm Penn, founder and CEO of chip industry analysis firm Future Horizons, has been forecasting since September 2022.

At TipRanks, the VanEck Semiconductor ETF is currently rated a ‘moderate buy’ based on ratings by 389 analysts. The average 12-month target price is $158.48, which would be an 8.44% rise from its last closing price of $146.14 on 2 June.