SMH holds 25 semiconductor companies, but the top 5 (NVIDIA, TSMC, Broadcom, ASML, Qualcomm) represent over 50% of the fund. In practice, buying SMH is a leveraged bet on NVIDIA with some diversification noise around it. When NVIDIA drops 15% on an earnings miss, SMH drops 4% even if every other semiconductor company reported strong results.
SOXX uses a modified equal-weight approach that's slightly better, but still overweights mega-caps and completely excludes many critical supply chain companies that are too small for the index.
The AI build-out depends on dozens of companies that ETFs either exclude or underweight:
These companies sit at constraint points in the supply chain where demand exceeds supply — precisely where the best risk-adjusted returns exist.
Closelook's Functional Index addresses this by weighting constituents by their supply chain function rather than market capitalization. In equal-weight mode, BESI has the same weight as NVIDIA. This means the index reflects the structural health of the entire AI supply chain, not just the performance of the biggest companies.
The practical implication: investors can use SMH/SOXX for core semiconductor exposure, but should overlay the Functional Index to detect divergences, identify bottleneck opportunities, and monitor supply chain stress that cap-weighted indices miss.
This is one of Closelook's most investable insights. The gap between what semiconductor ETFs track and what the AI supply chain actually needs creates a persistent structural opportunity. The Functional Index exists to close that gap.
Functional Index — How It Works →Rubin Index — Live Data →Constraint Sectors →