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The semiconductor industry is experiencing a pivotal moment. For investors looking to capitalize on this opportunity, two major exchange-traded funds stand out: VanEck's SMH and iShares' SOXX. Both have performed well in 2025, but their different approaches reveal important lessons about risk, concentration, and the power of a few dominant companies.
SMH vs SOXX
SMH has delivered an 18.04% return this year compared to SOXX's 12.42%. That 5.6% difference might seem modest, but it tells a crucial story about investment strategy.
SMH takes a concentrated approach, 73% of its money is invested in just its top 10 holdings. SOXX spreads its bets more evenly, with its top 10 positions making up 60% of the fund.
This concentration has paid off handsomely for SMH investors, largely because NVIDIA represents over 22% of the fund. When NVIDIA surged 53% this year, SMH shareholders felt the full impact.
SOXX, with only 8.8% in NVIDIA, didn't benefit as much from this rally.
The numbers speak for themselves: SMH manages $26.8 billion in assets—nearly double SOXX's $13.3 billion. It also trades more actively, with 7.8 million shares changing hands daily versus 5.4 million for SOXX. This higher liquidity becomes crucial during volatile periods when investors need to move quickly.
Key Comparison Metrics:
SMH: $26.8B assets, 18.04% YTD return, 73% in top 10 holdings
SOXX: $13.3B assets, 12.42% YTD return, 60% in top 10 holdings
Cost difference: 0.35% vs 0.34% expense ratios
The Power Players Shaping the Industry
The semiconductor sector's future increasingly depends on three companies: NVIDIA, Taiwan Semiconductor (TSMC), and Broadcom.
NVIDIA has become synonymous with AI. Its chips power everything from ChatGPT to autonomous vehicles. The company's 53% gain this year reflects Wall Street's belief that AI demand will continue growing exponentially. However, this concentration creates risk, if AI growth slows or competition intensifies, NVIDIA shareholders could face significant losses.
TSMC operates differently. Rather than designing chips, it manufactures them for other companies. Think of TSMC as the world's most advanced factory, producing chips for Apple, NVIDIA, and countless others. The company's Q2 revenue hit $30.1 billion, growing 19% QoQ, driven by high-performance computing demand. However, staying ahead requires massive investments, TSMC plans to spend $38-42 billion this year alone on new facilities and equipment.
Broadcom takes a third approach, focusing on specialized chips and networking infrastructure that enable AI systems to communicate effectively. Unlike NVIDIA, Broadcom doesn't compete directly in graphics chips but instead provides the essential plumbing that makes modern data centers work.
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Economic and Geopolitical Forces at Play
The AI Boom Continues
The global semiconductor market is projected to reach $697-700 billion in 2025, representing 11% growth. This expansion is almost entirely driven by artificial intelligence and data center buildouts. Companies are investing billions in AI infrastructure, creating sustained demand for the most advanced chips.
However, growth is becoming uneven. While AI-related semiconductors are booming, traditional applications like smartphones, PCs, and cars are struggling. This split explains why companies like NVIDIA are thriving while others face pressure.
The supply side presents challenges too. The most advanced chip manufacturing is expected to grow 14-17% annually through 2027, but 42% of supply chain executives expect shortages.
The problem? Only a few facilities worldwide can produce these cutting-edge chips, and most are in Taiwan.
The U.S.-China Tech War
The semiconductor industry has become ground zero for the U.S.-China tech competition. In 2025, this conflict has escalated significantly:
The U.S. imposed 100% tariffs on semiconductor imports and tightened export controls on advanced manufacturing equipment
China retaliated with rare earth export restrictions, targeting materials essential for chip production
New U.S. regulations added 140 entities to the restricted list, making it harder for Chinese companies to access American technology
These measures are reshaping the industry. While TSMC benefits from U.S. manufacturing investments (revenue surged to $30.1 billion), China's SMIC saw net income fall 19.5% despite heavy R&D spending.
China aims for 50% semiconductor self-sufficiency by 2025, but ongoing restrictions make this goal increasingly difficult to achieve.
The CHIPS Act Drives Domestic Production
The U.S. government's $52.7 billion CHIPS Act is rapidly transforming American semiconductor manufacturing. Already, $30 billion in grants and $25.1 billion in loans have been allocated across 23 projects in 14 states, nearly 60% of available funding deployed in record time.
Arizona is emerging as America's new chip capital. Intel and TSMC are receiving over $15 billion to build five new factories, attracting an additional $100 billion in private investment. Similar projects in Idaho, New York, Ohio, and Texas are creating a more distributed manufacturing base, reducing dependence on Taiwan.
Challenges remain, however. Worker shortages, permitting delays, and the complexity of building state-of-the-art facilities have slowed some timelines. The recent Building Chips in America Act aims to accelerate approvals by exempting semiconductor projects from certain environmental reviews.