7 Best Semiconductor ETFs to Buy in 2023

After soaring in 2020 and 2021 — thanks to demand from the cryptocurrency craze — the semiconductor industry hit snags in 2022 amid a general economic downturn. As inflation rose and tech companies took beatings from rising interest rates, demand for semiconductors fell, hurting the industry.

“One of the main risks in the semiconductor industry is its highly cyclical nature,” says Sean August, CEO of The August Wealth Management Group. “The industry is very dependent on the global economy and can experience significant swings in demand, leading to shortages,” he says.

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Other risks also loom on the horizon. The Russian invasion of Ukraine sparked similar worries for strained China-Taiwan relations, with the latter being a stronghold for semiconductor manufacturing. “The semiconductor industry is therefore vulnerable to geopolitical tensions and trade disputes that can disrupt supply chains and cause price volatility,” August says.

That being said, it isn’t all doom and gloom on the horizon for semiconductor stocks. “We see strong momentum for end markets like data centers, automotive, industrial deployments, automation and robotics, which should drive demand for smaller and low-power chips, sensing equipment, wireless components, and more,” says Tejas Dessai, research analyst at Global X ETFs.

Other catalysts at play include the recently passed CHIPS and Science Act, which will invest $280 billion to bolster domestic semiconductor research and development, manufacturing and workforce development. “This, along with a reshoring mandate to bring back manufacturing stateside will provide tailwinds to boost the industry over the next decade,” Dessai says.

While investors can try their luck with picking individual semiconductor stocks, this approach can lead to high company-specific risks. A better strategy could be to use an exchange-traded fund, or ETF, that holds a basket of semiconductor stocks based on an index or its own criteria.

“The potential benefits of investing in semiconductor ETFs include exposure to a high-growth sector with strong fundamentals, diversification across multiple companies in the industry, and the potential for long-term capital appreciation,” August says.

Investors looking to capitalize on the continued growth of the semiconductor industry can use these seven ETFs for a diversified bet:

Semiconductor ETF Expense ratio
iShares Semiconductor ETF (ticker: SOXX) 0.35%
VanEck Semiconductor ETF (SMH) 0.35%
SPDR S&P Semiconductor ETF (XSD) 0.35%
Invesco Dynamic Semiconductors ETF (PSI) 0.55%
First Trust Nasdaq Semiconductor ETF (FTXL) 0.6%
Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL) 0.94%
Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS) 1.02%

iShares Semiconductor ETF (SOXX)

“When looking for semiconductor ETFs, investors should consider factors such as the expense ratio, the underlying index or benchmark, the fund’s holdings and diversification strategy, and the ETF’s historical performance,” August says. “It is also important to assess the fund’s liquidity and trading volume to ensure that it is easy to buy and sell.”

An ETF that meets most of August’s criteria is SOXX, which tracks the ICE Semiconductor Index. This ETF currently sports over $7 billion in assets under management, or AUM, a 30-day average volume of around 895,000 shares, and a small median bidask spread of 0.03%. For a 0.35% expense ratio, or $35 annually per $10,000 invested, investors gain access to a concentrated portfolio of 30 U.S. semiconductor stocks.

VanEck Semiconductor ETF (SMH)

“When it come to semiconductor ETFs, I usually look for one that follows the PHLX Semiconductor Sector Index or something similar,” says Jose Najarro, contributing analyst at The Motley Fool. “The PHLX index is meant to hold the 30 largest U.S.-listed companies engaged in the semiconductor business,” Najarro says. A potential pick is SMH, which tracks the closely related MVIS US Listed Semiconductor 25 Index.

With 25 holdings, SMH doesn’t exactly follow the PHLX index, but it comes fairly close. Its holdings are similar to SOXX, with companies like Nvidia Corp. (NVDA), Advanced Micro Devices Inc. (AMD) and Texas Instruments Inc. (TXN) in the top 10 holdings. SMH charges the same expense ratio as SOXX at 0.35%. Because SMH tracks a different index than SOXX, the two could be used as tax-loss harvesting partners.

SPDR S&P Semiconductor ETF (XSD)

State Street offers multiple “select industry” ETFs that offer investors more targeted exposure than regular sector-specific investing. In the case of semiconductors, the ETF to buy is XSD, which tracks the S&P Semiconductor Select Industry Index. Unlike most ETFs, XSD uses a modified equal-weighted methodology to reduce its concentration in large-cap stocks.

Currently, this ETF sports 39 holdings. Thanks to its equal-weight strategy, large-cap stocks like Advanced Micro Devices are weighted similarly as smaller ones like Silicon Laboratories Inc. (SLAB) at around 3% each. The ETF is also very tax efficient thanks to its low 30-day SEC yield of just 0.37%. Like the previous ETFs, XSD also charges a 0.35% expense ratio.

Invesco Dynamic Semiconductors ETF (PSI)

PSI might track the Dynamic Semiconductor Intellidex Index, but it isn’t exactly a traditional passively managed ETF. Rather, it uses a “smart beta” methodology that screens potential holdings for numerous factors. These include price momentum, earnings momentum, quality, management action and value. These factors are designed to help PSI potentially outperform a regular index ETF over time.

Currently, PSI’s portfolio consists of 31 semiconductor stocks, weighted in a barbell approach thanks to its high concentration in both large-cap and small-cap stocks. Notable top holdings include Nvidia, Broadcom Inc. (AVGO), Applied Materials Inc. (AMAT) and Texas Instruments. Compared to the previous options, PSI charges a higher expense ratio of 0.55%.

[SEE: 7 Ways to Invest in the Energy Storage Boom.]

First Trust Nasdaq Semiconductor ETF (FTXL)

Another smart-beta ETF option is FTXL, which tracks the Nasdaq US Smart Semiconductor Index. This index starts by selecting the 30 most-liquid semiconductor stocks from the index, and then checks them for three factors: volatility, value and growth. Unlike market-cap weighted ETFs, FTXL allocates its portfolio based on each stock score for the above criteria, subject to caps to prevent concentration risk.

In terms of holdings, Broadcom, Analog Devices Inc. (ADI), Microchip Technology Inc. (MCHP), Texas Instruments and Intel Corp. (INTC) currently make up around 39% of the ETF’s total weight. Every quarter, FTXL will rebalance its portfolio, and reconstitute it annually to add or delete holdings. Like PSI, FTXL charges a higher expense ratio of 0.6%.

Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL)

Investors looking to day or swing trade the semiconductor industry can use leveraged ETFs like SOXL for enhanced exposure. This ETF targets a daily return three times that of the ICE Semiconductor Index. If the index returns 2% in a day, SOXL can be expected to rise by 6%. Conversely, if the index fell by 2% in a day, SOXL would return -6%. This makes it a high-risk, high-reward holding.

However, investors should note that leveraged ETFs like SOXL are not intended to be held for longer than a day. The three times leverage target is only accurate within a single trading day. If held longer, the compounding of sequential returns can produce wildly varying results. In addition, the ETF is quite pricey due to its use of swap derivatives, costing an expense ratio of 0.94%.

Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS)

Investors bearish on the short-term prospects of the semiconductor industry can take a short position by buying SOXS. This ETF acts as the inverse of SOXL, returning a daily return three times opposite that of the ICE Semiconductor Index. By buying SOXL, investors can benefit from falling semiconductor stock prices without using options or shorting stocks or other ETFs.

Like SOXL, SOXS is intended for short-term holds, ideally no more than a day. Over long periods of time, SOXS can be expected to lose value gradually and reverse split, as its underlying index has a positive expected return. Tracking error with SOXS may be amplified during high-volatility, sideways trading markets as well. As with SOXL, SOXS charges a high expense ratio of 1.02%.

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7 Best Semiconductor ETFs to Buy in 2023 originally appeared on usnews.com

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