The VanEck Semiconductor ETF (SMH) and iShares Semiconductor ETF (SOXX) are the most popular ways to get semiconductor exposure. But both are cap-weighted, which means they allocate capital based on company size, not supply chain function. The result: NVIDIA alone represents roughly 25% of SMH. TSMC, Broadcom, and ASML make up another 25%. Four companies drive half the index.
This creates a structural problem for investors who want broad AI infrastructure exposure. When NVIDIA drops 10%, SMH drops ~2.5% regardless of what's happening across the rest of the semiconductor supply chain. Critical bottleneck companies like Advantest (chip testing), BESI (hybrid bonding), or Modine (thermal management) have negligible weight — even though they are irreplaceable chokepoints in the AI build-out.
The Closelook Functional Index tracks 100 constituents across 6 layers and 18 sectors. Three weighting methodologies run in parallel: equal-weight (each constituent contributes equally), cap-weighted (for comparison), and momentum-weighted (overweighting recent outperformers).
The key insight: in equal-weight mode, a $5B testing equipment company has the same weight as NVIDIA. This means the index reflects the health of the entire supply chain, not just the health of the largest companies. When Advantest reports strong orders, the Functional Index catches it. SMH barely registers it.
The Functional Index is not a replacement for SMH — it's a structural overlay. It tells you whether the supply chain is healthy or stressed, whether bottlenecks are emerging, and which layers are leading or lagging. It's the difference between knowing NVIDIA's stock price and knowing whether NVIDIA can actually get the chips it needs.
Investors using the Functional Index alongside cap-weighted ETFs can detect divergence signals: when SMH rallies but the equal-weight Functional Index doesn't follow, it suggests the rally is NVIDIA-driven, not supply-chain-driven. That's a warning.
The Functional Index is Closelook's primary tool for monitoring the AI supply chain. It runs daily, covers 100 companies, and surfaces structural shifts that cap-weighted indices miss. If you're allocating to semiconductors based only on SMH or SOXX, you're flying with half the instruments.
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