New York, NY – The VanEck Semiconductor ETF (NASDAQ: SMH) has seen a significant surge in performance this year, boasting a year-to-date daily total return of 31.03% as of March 22nd. Key to this success are its substantial investments in prominent semiconductor companies like Nvidia (NVDA) and Advanced Micro Devices (AMD), which dominate the AI chip market. Nvidia, with a substantial 20.90% weight in the ETF, has been a standout performer driving the fund’s growth.

However, with increasing competition in the semiconductor industry, particularly from Nvidia and AMD, concerns arise about the potential negative impacts on SMH. Valuation of the ETF must consider factors like historical compound annual growth rate (CAGR) and the potential for mean reversion in stock prices. Given the intensifying competition in the AI industry, the potential for a mean reversion in Nvidia’s stock due to heightened competition poses a significant concern for SMH given its heavy reliance on Nvidia’s performance.

The SMH ETF, which tracks U.S. semiconductor stocks, has seen remarkable performance, reflecting the rapid advancements and popularity of AI technology. Major players like Nvidia and AMD, with significant holdings in the ETF, contribute to its success. As of March 2024, Nvidia composes a substantial 21% of SMH, while AMD accounts for 4.49%. The ETF also includes holdings from other semiconductor companies like Taiwan Semiconductor, Broadcom, and ASML Holdings, totaling 25 companies in all.

Looking at SMH’s performance in 2024, the ETF has outperformed its peers with a return of 29.42% and a 1-year daily return of 79.01%. While both NVDA and AMD play crucial roles in SMH’s success, the majority of positive impacts stem from Nvidia’s performance, raising concerns about the uneven contributions from these top holdings.

As competition between Nvidia and AMD heats up in the AI chip market, risks to profit margins and market share stability increase. AMD’s MI300 series challenges Nvidia’s dominance in high-performance computing for AI, leading to a response from Nvidia with planned product upgrades. The competition drives both companies to enhance chip performance and efficiency, benefiting suppliers like TSMC.

Nvidia’s leading position in the AI chip market is evident through significant revenue growth in their Data Center segment. Meanwhile, AMD’s advancements suggest a competitive landscape that could impact market dynamics and innovation rates over time. As competition rises, the potential for a price drop in Nvidia and, consequently, SMH cannot be overlooked.

Investors should closely monitor Nvidia’s market share in the AI GPU space to gauge the potential for maintaining margins and market dominance. The fund manager’s decisions on reallocating holdings, especially with a focus on diversifying away from heavy Nvidia allocations, could shape future performance and risk management strategies for the ETF.