SMH’s Strong Outperformance over the Broader Indexes
The VanEck Vectors Semiconductor ETF (SMH) follows a replication strategy, which is basically an indexing strategy that involves investing in the securities (INTC) (NVDA) of the semiconductor index in approximately the same proportion as the Index. Consequently, the fund does not aim to beat the index like many investment companies that try to outperform the benchmark. The fund also does not intend to take temporary defensive positions when the markets (QCOM) (TXN) are in a corrective mode or are overvalued. Although this strategy rules out the chance of the fund substantially outperforming its underlying index, it helps mitigate the risks involved in the active management of the fund such as substandard security selection. Indexing also helps keep costs lower and have a better after-tax performance by keeping portfolio turnover low compared to actively managed investment companies.
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Historically, SMH has provided healthy returns that have comfortably outperformed the broader equity indexes. For the first seven months of this year, SMH returned 19.8%, which was higher than 10.4% generated by the S&P 500 and 17.9% returned by the technology-heavy NASDAQ. Similarly, for the year ended July 31, 2017, SMH posted a stellar rise of 36.3% compared to rises of just 13.8% and 21.8% for the S&P 500 and NASDAQ, respectively. SMH’s performance over a longer period imitates its outperformance over the short term. As you can see in the above chart, for the five years ended September 6, 2017, SMH rose more than twice compared to the S&P 500 while delivering more than 50.0% excess returns over NASDAQ.