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Many clients and investors, advisors, too, don’t get into the weeds when it comes to technology stocks so it’s not surprising that many market participants don’t know exactly what defines a fabless semiconductor company.
It’s actually is easy to define and the companies are familiar. Nvidia (NVDA) is one. Put simply, a fabless semiconductor company designs its chips in-house, but outsources the production of the chips to a foundry. Advisors and some clients are familiar with at least one foundry: Taiwan Semiconductor (TSM). Now, investors can access a basket of fabless semiconductor stocks.
Leave it to the ever innovative exchange traded funds industry to make that possible. The VanEck Fabless Semiconductor ETF (SMHX) debuted a couple of weeks ago and as its name implies, its point of emphasis is fabless chip equities. The new ETF tracks the MarketVector™ US Listed Fabless Semiconductor Index.
Home to 21 stocks, SMHX could be worth considering by tactical investors that are looking to tap into the semiconductor industry’s long-running shift to the fabless model.
SMHX Could Be at Right Place at Right Time
As noted above, Nvidia is a fabless company and it has established dominant positioning in artificial intelligence (AI) and graphics chips, among others. That status is reflected in SMHX where the stock is the ETF’s largest holding, accounting for 19.63% of the rookie fund’s roster.
Obviously, Nvidia’s market share and stock performance aren’t going unnoticed by rivals. Competitors, including SMHX member firms, are upping their emphasis on design and innovation while moving production responsibility to foundries. It’s a trade-off that’s produced steadily rising revenue for fabless companies over the past seven years. It’s also stoking mergers and acquisitions activity. Take the case of Advanced Micro Devices (AMD), SMXH’s third-largest holding.
“AMD’s recent $4.9 billion acquisition of ZT Systems marks a strategic expansion into the data center market, particularly in server and cloud solutions,” notes Nick Frasse of VanEck. “A critical aspect of this acquisition is AMD’s intention to spin off ZT Systems' manufacturing operations, aligning with the fabless model that AMD has championed. This move allows AMD to maintain its focus on chip design and innovation while outsourcing the capital-intensive and complex manufacturing process.”
That acquisition and AMD’s exit from foundry/manufacturing side of the chip business is just one example, but it underscores the point that the fabless model offers efficiencies to chip designers and is increasingly attractive to those firms.
Chip Future Is Fabless
While the concept of fabless semiconductors isn’t new, Nvidia arguably accelerated that shift within the industry, but that doesn’t insulate the company from rivals adopting and potentially exceling with fabless model.
Said another way, the future of the chip industry is fabless and that could imply Nvidia is in for some pressure from rivals and that could be a sign that a broad-based approach to the fabless space, such as SMXH, is relevant.
“The semiconductor industry is in a state of flux, with the fabless model gaining traction as a preferred strategy for many leading companies,” concludes Frasse. “As Nvidia’s margins face potential pressures from growing competition, diversifying investments within the fabless sector could offer a way to navigate these uncertainties. By spreading exposure across a range of fabless companies, investors might be better positioned to benefit from industry growth while managing the risks associated with any single company's future performance.”
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