SMH vs SOXX: What's the Better Semiconductor ETF Buy?

Since the artificial intelligence (AI) boom began, one of the biggest market winners has been semiconductor stocks. The two largest exchange-traded funds (ETFs) that investors can choose between for exposure to this sector are the VanEck Semiconductor ETF (NASDAQ: SMH) and the iShares Semiconductor ETF (NASDAQ: SOXX).

Which one is better for investors? Let's break down the key considerations.

Category exposure

In short, the biggest difference between the two ETFs is concentration.

Both ETFs track an index of semiconductor manufacturers that is weighted according to market capitalization, and hold roughly 25-30 positions.

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The VanEck ETF weights its portfolio without constraint. That means the largest companies, such as Nvidia and Taiwan Semiconductor Manufacturing, can have huge allocations due to their relative size. Combined, those two companies alone account for roughly one-third of the portfolio.

The iShares ETF, on the other hand, puts caps on individual holding weights. The top five securities are capped at 8% and any remaining positions are capped at 4%. Additionally, the total weight given to American depositary receipts (ADRs) is limited to no more than 10% of the portfolio.

That makes the VanEck ETF more concentrated, more top-heavy, and much more tilted to the largest semiconductor companies. The iShares ETF tends to be less concentrated and spread out more between larger and smaller companies.

The verdict: SMH vs. SOXX

The choice of which is "better" largely comes down to whether you want heavier exposure to the industry's biggest companies.

Given that the market has favored large caps for some time, I'm inclined to believe that the VanEck Semiconductor ETF is the better choice at the moment. Investors haven't shown a consistent willingness to give up their large-cap bias.

Over the longer term, more diverse exposure to the semiconductor space might be preferable since there's less reliance on just a few big names. Given current conditions, however, VanEck looks like the winner.

David Dierking has positions in iShares Trust-iShares Semiconductor ETF. The Motley Fool has positions in and recommends Nvidia, Taiwan Semiconductor Manufacturing, and iShares Trust-iShares Semiconductor ETF. The Motley Fool has a disclosure policy.