SMH Was the One of the Best-Performing Non-Leveraged ETFs of the Last Decade. Here Is the Concentration Risk Investors Miss

Forget Bitcoin, gold, or the occasional WallStreetBets options trade that pays off. One of the biggest winners of the last decade has been the VanEck Semiconductor ETF (NASDAQ: SMH).

Over the trailing 10-year period as of March 31, 2026, SMH delivered a 31.34% annualized return at net asset value. That’s exceptional compounding over a sustained period. Of course, that headline number doesn’t show the full picture. There was plenty of volatility along the way, with sharp drawdowns and periods where investors had to sit through unrealized losses.

But even with that, the consistency relative to its benchmark stands out. SMH tracks the MVIS U.S. Listed Semiconductor 25 Index, and the tracking error has been minimal. Over that same period, the index returned 31.45% annualized, which is very close. For an ETF, that level of precision is about as good as it gets.

Still, strong past performance doesn’t automatically make it the best choice going forward, and in this case, there’s a key issue that novice investors tend to overlook: concentration risk.

Why SMH Has Concentration Risk

The root of the issue lies in how SMH is constructed. The MVIS U.S. Listed Semiconductor 25 Index focuses on the largest and most liquid companies in the industry and uses a market-cap-weighted approach. That means the bigger a company gets, the more influence it has on the ETF.

In a long bull market, this works in your favor. Winners keep getting larger weights, and you benefit from their momentum. But that dynamic can flip. If you look at SMH today, the portfolio is heavily concentrated at the top.

As of April 21, Nvidia makes up 18.57% of the fund, while Taiwan Semiconductor sits at 10.63%. Together, those two names account for nearly a third of the ETF. That creates a very different risk profile than many investors expect.

A single earnings miss or negative development from either company could move the ETF meaningfully in a short period. It’s not unreasonable to see swings of several percentage points in a single day driven by just those two holdings.

In other words, what used to be a broad industry bet has increasingly become a narrower bet on a handful of dominant players. If your goal is more diversified semiconductor exposure, that may not be ideal.

An Alternative ETF to Consider

This isn’t an argument against semiconductors as a whole, or even against owning companies like Nvidia or Taiwan Semiconductor. It’s about how you access that exposure. If an ETF is heavily dominated by a few names, you have to ask whether it’s worth paying a 0.35% expense ratio for something that behaves like a concentrated position.

One alternative is the SPDR S&P Semiconductor ETF (NYSEMKT: XSD) at the same 0.35% expense ratio. Instead of weighting companies by size, it uses an equal-weight methodology. The fund holds 44 semiconductor companies, and at each rebalance, each one receives roughly the same allocation.

That changes the dynamics significantly. Between rebalances, the best-performing stocks naturally rise to the top, but they are trimmed back periodically, while underperformers are added to. Over time, this creates a systematic buy-low, sell-high effect.

The trade-off is performance in strong bull markets. Over the last decade, XSD has returned 22.62% annualized, which is still strong but below SMH. That gap largely reflects the outsized gains of the largest semiconductor companies.

But investing is forward-looking. If the next phase of the semiconductor cycle is broader, or if leadership rotates, an equal-weight approach may provide more balanced exposure across the industry.