The U.S. technology sector bucked its 2022 slump to rally strongly this year so far, with the technology-heavy Nasdaq-100 index surging 37% as of June 27.
As hype around artificial intelligence, or AI, has steadily built, numerous mega-cap tech stocks such as Alphabet Inc. (ticker: GOOG, GOOGL), Microsoft Corp. (MSFT) and Meta Platforms Inc. (META) have recorded strong quarterly earnings riding the AI wave.
However, the outperformance of these stocks has been outshined by chipmaker Nvidia Corp. (NVDA). As one of the world’s largest semiconductor manufacturers, Nvidia’s share price rocketed by around 24% on May 25 following a blockbuster earnings report. Buyers were encouraged by guidance from management on increased demand for the company’s semiconductors.
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If AI is the modern-day gold rush, then semiconductors could be the tools prospectors use to strike it rich. “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.
Dessai is also bullish on long-term secular trends stemming from the CHIPS and Science Act that was passed by Congress in August 2022. The act bolstered American semiconductor research, development and production, aiming to reduce domestic dependence on global semiconductor supplies.
“This, along with a reshoring mandate to bring back manufacturing stateside will provide tailwinds to boost the industry over the next decade,” Dessai says. “Moreover, the rise of data-intensive computing, cloud applications, streaming experiences and AI all demand a host of new hardware, which will continue to drive growth for semiconductors overall.”
However, investing in the semiconductor industry isn’t for the faint of heart. As a specialty sector within the overall technology industry, semiconductor stocks have historically been volatile.
“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.”
Investors must also watch out for geopolitical risk. This is largely due to the strained nature of China-Taiwan relations, with the latter being a vital player in the global semiconductor supply chain. “The semiconductor industry is therefore vulnerable to geopolitical tensions and trade disputes that can disrupt supply chains and cause price volatility,” August says.
To lessen these risks, investors can diversify their semiconductor bet among stocks from different countries and market cap sizes. Using an exchange-traded fund, or ETF, that holds a basket of semiconductor stocks is an easy way to achieve this diversification.
Here’s a look at seven of the best semiconductor ETFs available now:
| ETF | Expense ratio |
| iShares Semiconductor ETF (SOXX) | 0.35% |
| VanEck Semiconductor ETF (SMH) | 0.35% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% |
| First Trust Nasdaq Semiconductor ETF (FTXL) | 0.6% |
| Invesco Dynamic Semiconductors ETF (PSI) | 0.55% |
| Invesco PHLX Semiconductor ETF (SOXQ) | 0.19% |
| Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL) | 0.94% |
iShares Semiconductor ETF (SOXX)
“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.
SOXX, for example, has returned an annualized 23.9% over the past 10 years, strongly outperforming the broader stock market.
With around $8.8 billion in assets under management, or AUM, SOXX is one of the most popular semiconductor ETFs on the market. As a result of its popularity, the ETF exhibits strong liquidity, with around 1.4 million shares traded on average over a 30-day period, along with a 30-day median bid-ask spread of just 0.03%. SOXX tracks the ICE Semiconductor Index and charges a 0.35% expense ratio.
VanEck Semiconductor ETF (SMH)
“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 these criteria is SMH, which rivals SOXX in terms of popularity with more than $9 billion in AUM and an identical 0.35% expense ratio. This ETF tracks the MVIS US Listed Semiconductor 25 Index, and currently sports a five-star Morningstar rating, meaning that it has historically outperformed the majority of its peer category on a risk-adjusted basis.
SPDR S&P Semiconductor ETF (XSD)
Most semiconductor ETFs utilize a market cap-weighted methodology, which assigns proportionately higher weights to stocks with larger market cap sizes. This approach can lead to concentration risk when a handful of mega-cap semiconductor stocks dominate the top holdings of the ETF. To remedy this, investors can consider XSD, which uses a modified equal-weight index.
By tracking the S&P Semiconductor Select Industry Index, XSD provides more uniform exposure across 38 large-, mid- and small-cap U.S. semiconductor stocks. For example, Nvidia accounts for only about 3% of this ETF, despite having a fairly large market cap. The ETF charges the same 0.35% expense ratio as SMH and SOXX, which makes it competitive in terms of costs.
[See: 7 Top Equal-Weight ETFs to Buy]
First Trust Nasdaq Semiconductor ETF (FTXL)
Some semiconductor ETFs go an extra step to screen potential holdings for additional metrics. This is usually done to ensure that the resulting portfolio meets certain criteria for financial health, growth prospects or other factors. A great example is FTXL, which tracks the Nasdaq U.S. Smart Semiconductor Index. However, it has a higher expense ratio (0.6%) than SOXX, SMH and XSD.
FTXL’s index selects semiconductor stocks from the Nasdaq U.S. Benchmark Index and ranks them based on three factors: trailing 12-month return on assets, trailing 12-month gross income and momentum in the form of three-, six-, nine- and 12-month share price appreciation. After the stocks are ranked, the bottom quartile is discarded and the remaining are weighted based on their trailing 12-month cash flow.
Invesco Dynamic Semiconductors ETF (PSI)
Another five-star-Morningstar-rated semiconductor ETF to watch is PSI. This ETF tracks the Dynamic Semiconductors Intellidex Index, which, like the index used by FTXL, uses additional screeners to select stocks. Currently, this includes checking for share price momentum, earnings momentum, financial and management quality, and value.
Currently, PSI holds 31 stocks, with Nvidia at the top with a 6% allocation. In second and third place come Broadcom Inc. (AVGO) and Applied Materials Inc. (AMAT) at 5.5% and 5.2%, respectively. Nvidia’s main competitor, Advanced Micro Devices Inc. (AMD), currently sits in seventh place with a 4.5% weighting. The ETF charges a 0.55% expense ratio.
Invesco PHLX Semiconductor ETF (SOXQ)
ETFs like FTXL and PSI that implement additional screens into their indexes tend to charge a higher expense ratio. Over the long term, there is a risk that these higher fees can eat into overall returns. For cost-conscious investors looking to prioritize low fees, a great alternative to PSI also offered by Invesco is SOXQ, which sports the lowest expense ratio on this list at 0.19%.
By tracking the PHLX Semiconductor Sector Index, SOXQ provides exposure to the 30 largest U.S. listed semiconductor stocks. Currently, its top holdings include Nvidia, Broadcom, Intel Corp. (INTC), Texas Instruments Inc. (TXN) and AMD. However, investors should note that this ETF is less popular than the previous options, having only about $132 million in AUM.
Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL)
Most of the previous ETFs offer the ability to trade options, which can offer investors magnified exposure. In addition, investors can also purchase these ETFs on margin to enhance their returns. Investors unwilling to trade options on semiconductor ETFs or leverage their positions with margin can still obtain enhanced exposure via SOXL, which charges a 0.94% expense ratio.
This leveraged ETF targets a daily return three times that of the ICE Semiconductor Index. Should the index rise by 1%, SOXL will return 3%. If the index falls by 1%, SOXL will drop 3%. The leveraged exposure is calculated on a daily basis, which makes SOXL most suitable as a short-term trading tool. Investors who hold SOXL long-term may experience very high volatility and unpredictable results.
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7 Best Semiconductor ETFs to Buy in 2023 originally appeared on usnews.com
Update 06/28/23: This story was published at an earlier date and has been updated with new information.
