Chip ETF's Split Personality: SMH Trails Rivals on Flows Even as AI Spending Fuels Sector Rally

SMH falls 1.16% on China AI cost fears, down 20% from peak, yet up 48% YTD. Investors shift to SOXX and SOXL.

The semiconductor trade is telling two stories at once. On one side, hyperscaler earnings have reaffirmed the billions flowing into AI infrastructure. On the other, a fresh wave of anxiety over cheaper Chinese AI models has knocked the sector back on its heels — and the VanEck Semiconductor ETF (SMH) is absorbing both shocks.

The fund slipped 1.16% on Monday to EUR 459.95, while the broader PHLX Semiconductor Index shed 2% in early trading. The trigger came from two directions at once: Alibaba unveiled what it calls its most powerful AI model to date, Qwen3.8-Max, and a research note surfaced suggesting DeepSeek's latest offering operates at a fraction of the cost of Anthropic's Claude Fable 5 — reportedly more than a hundred times cheaper.

That combination has investors questioning whether China's low-cost AI push undermines the pricing power of US chipmakers. The sell-off swept across the sector. Memory specialists Micron Technology and SK Hynix each fell roughly 4% on US exchanges, Nvidia gave back 1%, AMD dropped more than 2%, and Intel, Marvell and Qualcomm all slid. Equipment makers ASML, Applied Materials and Lam Research followed suit.

A Correction With Deep Roots

Monday's move was hardly an isolated event. The sector has been in a corrective phase since hitting its June peak. SMH has lost 11.84% over the past 30 days and now sits more than 20% below its 52-week high of EUR 580.50. The pain extends well beyond US borders — SK Hynix lost 14.65% in a single session last week, while Samsung Electronics shed over 13%.

The irony is that the same AI narrative that powered the sector's ascent is now fueling its vulnerability. Semiconductors were the engine of this year's AI trade, and that concentration cuts both ways when doubts emerge about growth assumptions. The tension is straightforward: optimism over hyperscaler infrastructure spending collides with the fear that Chinese providers, moving at an accelerating pace, could hollow out the demand forecasts underpinning US valuations.

The Flow Gap

Yet the correction masks an otherwise extraordinary year. SMH remains up 48.08% year-to-date, and its annual return through July 31 stood at 50.03%. The fund's assets reached $68.10 billion at the end of July. But here's the puzzle: despite the sector's strength, SMH is attracting less fresh capital this week than its rivals.

The iShares Semiconductor ETF (SOXX) and the Direxion Daily Semiconductor Bull 3X ETF (SOXL) are pulling in a larger share of new money. SOXL drew roughly $2.4 billion — and that was the weakest of the three. The divergence suggests investors aren't treating semiconductors as a single trade. They're choosing deliberately between SMH's heavy concentration, SOXX's broader diversification and SOXL's leveraged exposure.

Concentration as a Double-Edged Sword

SMH's structure is its defining feature. Nvidia alone accounts for 20.8% of the portfolio, followed by Taiwan Semiconductor Manufacturing at 9.6%, Broadcom at 6.6% and AMD at 5.7%. The top 10 positions together represent roughly 72% of fund assets — significantly more than SOXX. Current holdings data shows 26 individual names, with Nvidia at 21.70%, TSMC at 9.51%, Broadcom at 6.73%, AMD at 5.43% and ASML at 5.12%.

SOXL operates on an entirely different principle. The $15.4 billion fund, launched in March 2010 with an expense ratio of 0.75%, chases three times the daily return of the SOXX index through swaps and futures. AMD and Nvidia remain its largest direct holdings at 4.9% and 4.8%, but the leverage cuts both ways — which explains why SOXL is down 15.5% this year while SOXX and SMH are each off only about 4%.

SMH's price action reflects the sector's volatility. On Sunday, the fund traded between a high of $561.44 and a low of $535.26. Its 52-week range spans from $279.19 to $671.83.

What's Driving the Divergence

Microsoft's 16% jump on strong Azure cloud results and Amazon's 11% gain after a solid second quarter both underscored the scale of AI infrastructure spending — money that flows directly to the chip names dominating SMH's portfolio. Even with bond yields at multi-year highs, the chip rally has so far shrugged off the pressure.

But the flow picture suggests a more nuanced investor mindset. Rather than simply buying "semiconductors," money managers are picking specific fund structures to match their risk appetite. SMH offers concentrated exposure to the largest, most liquid US-listed chip names. SOXX spreads the bets more widely. SOXL amplifies the daily swings.

As long as cloud giants continue backing their AI ambitions with strong earnings, the competition for investor dollars among these three funds is likely to persist. The sector's fate, meanwhile, remains tethered to an AI narrative that now includes an increasingly confident Chinese challenger.