7 Best Semiconductor ETFs to Buy in 2023

Exchange-traded funds, or ETFs, have revolutionized the investment landscape by offering unparalleled flexibility, allowing investors to curate portfolios that align with specific financial goals and risk appetites.

From focusing on particular stock styles like value, to diving deep into market capitalizations such as small caps, to exploring global markets or individual sectors like technology, ETFs provide a gateway while offering low costs and transparency.

Within these sectors, investors can further refine their choices by zoning in on specific industry groups. A notable example within the technology sector is the semiconductor industry, which has gained traction throughout 2023 due to its pivotal role in the expansion and success of major tech companies, especially in the wake of recent artificial intelligence, or AI, advancements.

“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.

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Long-term tailwinds are at play here, too. In August 2022, President Joe Biden signed into law the CHIPS and Science Act, which created numerous incentives geared to kick-start stronger levels of domestic semiconductor industry research and production.

“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, investors need to understand that the high growth of the semiconductor industry comes with a unique set of dangers to keep in mind. “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.”

Another risk to watch out for is geopolitical tension, largely driven by the strained nature of China-Taiwan relations. Because the latter houses pivotal semiconductor companies like Taiwan Semiconductor Manufacturing Co. Ltd. (ticker: TSM), possible conflicts or sanctions could negatively affect the entire downstream global industry.

“The semiconductor industry is therefore vulnerable to geopolitical tensions and trade disputes that can disrupt supply chains and cause price volatility,” August says.

With this in mind, here’s a look at seven of the best semiconductor ETFs to buy in 2023:

ETF Expense ratio
VanEck Semiconductor ETF (SMH) 0.35%
iShares Semiconductor ETF (SOXX) 0.35%
First Trust Nasdaq Semiconductor ETF (FTXL) 0.6%
SPDR S&P Semiconductor ETF (XSD) 0.35%
Direxion Daily Semiconductor Bull 3X Shares (SOXL) 0.94%
Direxion Daily Semiconductor Bear 3X Shares (SOXS) 1.02%
GraniteShares 1.5x Long NVDA Daily ETF (NVDL) 1.15%

VanEck Semiconductor ETF (SMH)

“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. For example, SMH has earned an annualized 24.2% return since its inception on Dec. 20, 2011, drawing a five-star Morningstar rating.

Traded on the Nasdaq exchange, this ETF currently possesses around $9.4 billion in assets under management, or AUM, making it the largest U.S.-listed semiconductor ETF. By tracking the MVIS U.S. Listed Semiconductor 25 Index, SMH provides exposure to the largest and most liquid semiconductor stocks, such as Nvidia Corp. (NVDA), TSM and Broadcom Inc. (AVGO), for a 0.35% expense ratio. That means you’ll pay $35 annually for every $10,000 invested.

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.”

Another highly popular semiconductor ETF is SOXX, which trails SMH slightly with just over $8.8 billion in AUM. The ETF is highly liquid, with a 30-day median bid-ask spread of just 0.03%. Its benchmark, the ICE Semiconductor Index, currently has Nvidia, Broadcom, Advanced Micro Devices Inc. (AMD) and Intel Corp. (INTC) as its top holdings. SOXX also charges a 0.35% expense ratio.

First Trust Nasdaq Semiconductor ETF (FTXL)

Both SOXX and SMH take a fairly simple approach to screening their portfolio by including the largest and most liquid U.S.-listed semiconductor stocks. For a more stringent approach that also considers fundamental factors, investors can buy FTXL, which tracks the Nasdaq U.S. Smart Semiconductor Index with more screeners, albeit for a higher 0.6% expense ratio.

To be eligible for inclusion in FTXL, a semiconductor stock is ranked based on its trailing 12-month return on assets; trailing 12-month gross income; and three-, six-, nine- and 12-month momentum. Then, the bottom quartile is eliminated, and the remaining 30-50 stocks are weighted based on their trailing-12-month cash flow, with a minimum weight of 0.5% and a maximum weight of 8% to ensure diversification.

[READ: 10 Best Tech Stocks to Buy for 2023]

SPDR S&P Semiconductor ETF (XSD)

Market-cap-weighted semiconductor ETFs like SMH and SOXX tend to be top heavy, with their holdings and performance dominated by a select handful of large-cap stocks. To reduce concentration risk, investors can consider an equal-weighted ETF like XSD. By tracking the S&P Semiconductor Select Industry Index, XSD delivers more palpable exposure to small- and mid-cap semiconductor stocks.

For instance, semiconductor and chipmaker giant Nvidia only accounts for about 3.4% of XSD’s 38 holdings at present, while Intel and Broadcom sit at roughly 3% each. While this can limit returns when these giants outperform, it can also reduce risk when they underperform, especially after a large run-up. The ETF charges a 0.35% expense ratio, the same as SMH and SOXX.

Direxion Daily Semiconductor Bull 3X Shares (SOXL)

Semiconductor bulls more interested in day or swing trading the industry can use a leveraged ETF like SOXL for magnified exposure. This ETF aims to deliver a daily return three times that of the ICE Semiconductor Index, which is the index tracked by SOXX. Should the index rise by 1% in a day, SOXL will return 3%, and vice-versa if it falls.

However, investors should note that SOXL is intended to be a short-term trading tool. The three-times-leverage target is only intended to be accurate for a single day. Past that, volatility and compounding can cause different, unpredictable results. The ETF also has very high volatility and a much higher expense ratio of 0.94%. Beginner investors should take these factors into account before buying.

Direxion Daily Semiconductor Bear 3X Shares (SOXS)

On the other hand, semiconductor bears looking to bet on a reversal in the industry’s recent strong performance may prefer an inverse ETF like SOXS. This ETF is the opposite of SOXL, aiming to deliver a daily return three times the inverse of the ICE Semiconductor Index. If the index falls by 1%, SOXS should rise by 3% that day, and vice versa.

The same risks with SOXL in terms of compounding and volatility also apply to SOXS, but to a greater degree given its inverse nature. Historically, this ETF has decayed in price steadily as the semiconductor industry trended upward, necessitating periodic reverse splits to keep its price up. Given this and its high 1.02% expense ratio, the ETF is best suited as a short-term trading tool.

GraniteShares 1.5x Long NVDA Daily ETF (NVDL)

Investors bullish on Nvidia and looking to trade it with magnified exposure can use tools like margin or call options to produce leverage, but each of these approaches has its own downsides. Margin trading can incur margin calls and borrowing fees, while options trading requires juggling multiple variables such as expiration dates, implied volatility and strike prices that all affect pricing.

For a simpler alternative that only requires buying and selling, consider a leveraged single-stock ETF like NVDL. This ETF aims to deliver one-and-a-half times the daily performance of Nvidia. If Nvidia’s stock goes up by 1% in a day, NVDL will deliver 1.5%, and vice versa if it falls. As with other leveraged ETFs, NVDL charges a high 1.15% expense ratio and is not intended for long-term holding.

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

Update 08/23/23: This story was previously published at an earlier date and has been updated with new information.

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