During the gold rush of the 19th century, it wasn’t just the fortunate prospectors who struck it rich. Arguably, one of the most enduring success stories emerged from an entirely different angle.
Two entrepreneurs, Levi Strauss and Jacob Davis, recognized the miners’ need for durable clothing. They began selling denim jeans, which eventually laid the foundation for the globally recognized brand Levi’s. Instead of mining for gold, they provided essential tools for those who did — and made a fortune.
If the rapid ascension of artificial intelligence, or AI, today stands as the modern gold rush, then a smart investor might consider aligning with industries powering this technological revolution. At the forefront of this movement are semiconductors.
“Semiconductors are an indispensable component of all modern electronic devices, and their importance has grown significantly in the aftermath of the pandemic-induced chip shortage and the surging demand for AI,” says Rene Reyna, head of thematic and specialty product strategy at Invesco.
Semiconductor companies design and manufacture the vital chips that serve as the brains behind electronic devices, ranging from smartphones to cars, appliances and the modern-day data infrastructure that powers AI development and applications.
“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, assistant vice president and research analyst at Global X ETFs.
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In essence, semiconductors provide the very bedrock upon which much of our modern technological infrastructure is built. “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,” Dessai says.
However, trying to pick the best semiconductor company may not be the best approach. The industry is considered highly volatile due to its susceptibility to a wide range of risks, such as supply-demand imbalances and geopolitical conflicts.
“While demand for semiconductors remains robust and stocks within the sector have shown relatively strong performance throughout much of 2023, the near-term outlook is more nuanced due to an uncertain macroeconomic landscape, geopolitical uncertainties and ongoing assessment of the semiconductor inventory cycle,” Reyna says.
Moreover, companies are not equally affected by these risks. For example, an overseas company like Taiwan Semiconductor Manufacturing Co. Ltd. (ticker: TSM) would be heavily impacted by deteriorating China-Taiwan relations, while a U.S. company like Nvidia Corp. (NVDA) may be less affected.
“Recent restrictions on exporting advanced chips to China also weighed on the market, although most U.S. semiconductor manufacturers such as Nvidia claim demand is so high that the restrictions do not pose a meaningful threat,” Reyna says.
As a result, prospective semiconductor investors may wish to bet on the overall trajectory of the industry instead of making single stock picks. The ideal instrument here is an exchange-traded fund, or ETF, that holds a basket of different semiconductor stocks.
Here are seven of the best semiconductor ETFs to buy in 2023:
| 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) | 0.60% |
| Invesco PHLX Semiconductor ETF (SOXQ) | 0.19% |
| Invesco Semiconductors ETF (PSI) | 0.57% |
| Direxion Daily Semiconductor Bull 3X Shares (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,” says Sean August, CEO of the August Wealth Management Group. For example, SOXX has returned an annualized 10.2% since its inception on Jul. 10, 2001.
This ETF boasts more than $8.5 billion in assets under management, or AUM, making it one of the most popular semiconductor ETFs by size today. It tracks the ICE Semiconductor Index, which currently has 30 holdings. Notable names in SOXX’s portfolio include Advanced Micro Devices Inc. (AMD), Broadcom Inc. (AVGO), Nvidia and Intel Corp. (INTC). SOXX 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.”
Another highly popular and liquid alternative to SOXX is SMH, which is actually larger with around $9.1 billion in AUM. This ETF tracks the MVIS U.S. Listed Semiconductor 25 Index, which targets the largest and most liquid semiconductor stocks. Compared to SOXX, SMH is more top-heavy, with Nvidia and TSM making up around 19% and 13% of the ETF respectively. It also charges a 0.35% expense ratio.
SPDR S&P Semiconductor ETF (XSD)
Investors looking for more exposure to up-and-coming semiconductor stocks may prefer an ETF like XSD, which utilizes a modified equal-weight approach. By doing so, the ETF holds a much greater proportion of small- and mid-cap semiconductor stocks compared to market-cap weighted ETFs like SMH and SOXX. This ETF has been around since January 2006 and also charges a 0.35% expense ratio.
SMH’s equally weighted methodology results in a list of top holdings that differs significantly from SOXX and SMH. At present, the largest holding in XSD’s portfolio is Synaptics Inc. (SYNA) at 2.9%, which only has a market capitalization of around $3.5 billion. Keep in mind that while XSD’s methodology may offer greater exposure to these small caps, it can also result in higher volatility.
[READ: 6 of the Best AI ETFs to Buy Now]
First Trust Nasdaq Semiconductor ETF (FTXL)
Regular index ETFs like SMH and SOXX are designed to provide broad industry exposure based on market capitalization. That is, their indexes make no attempt to exclude stocks based on unfavorable fundamentals. Investors who desire a slightly more active approach may prefer an ETF like FTXL, which implements a series of quantitative screeners.
To select its portfolio, FTXL ranks eligible semiconductor stocks based on trailing 12-month return on assets, gross income and momentum, eliminating those ranked in the bottom quartile. The remaining 30 to 50 selected stocks are weighted not based on market cap, but rather based on their 12-month trailing cash flow up to an 8% cap on individual holdings. FTXL charges a higher 0.6% expense ratio.
Invesco PHLX Semiconductor ETF (SOXQ)
“The broader semiconductor industry has been in correction territory since July 31, down approximately 12%, but the growth outlook appears promising as we approach earnings season,” Reyna says. “Overall, demand for AI applications is growing and inventories are decreasing, which may indicate the bottoming of the inventory cycle.”
Investors looking for a lower-cost semiconductor ETF to take part in this trend can buy SOXQ, which charges a 0.19% expense ratio. By tracking the PHLX Semiconductor Sector Index, this ETF holds the 30 largest U.S.-listed semiconductor companies weighted by modified market capitalization, which includes the likes of Intel, AMD, Broadcom, Nvidia, and TSM, among others.
Invesco Semiconductors ETF (PSI)
“Additionally, it must be noted that tens of billions of dollars have been enacted globally to directly subsidize local chip production in many regions,” Reyna says. “The U.S. CHIPS and Science Act earmarked $52.7 billion for semiconductor production, and other governments have also committed tens of billions of dollars in domestic subsidies.”
To take part in these tailwinds, investors can buy PSI, which tracks the unique Dynamic Semiconductor Intellidex Index. “The index seeks to go beyond traditional measurements to consider the fundamentals that drive healthy companies and growth,” Reyna says. The ETF screens its 30 holdings for factors like price momentum, earnings momentum, quality, management action and value in an attempt to outperform. PSI charges a 0.57% expense ratio.
Direxion Daily Semiconductor Bull 3X Shares (SOXL)
Traders with a bullish view and looking for a more short-term holding can consider a leveraged ETF like SOXL. This ETF uses derivatives to deliver three times the daily returns of the ICE Semiconductor Index, the benchmark tracked by SOXX. If the index returns 1% in a day, SOXL is expected to return 3%. However, if the index falls 1% in a day, SOXL will fall 3%.
It’s crucial to note that SOXL’s three times leverage target is only intended to be accurate for a single day. Holding SOXL for periods longer than that can result in unpredictable returns due to compounding. Keep in mind that the ETF is very volatile and charges a high 0.94% expense ratio. For semiconductor bears, SOXL has an inverse counterpart, the Direxion Daily Semiconductor Bear 3X Shares (SOXS).
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7 Best Semiconductor ETFs to Buy in 2023 originally appeared on usnews.com
Update 10/23/23: This story was previously published at an earlier date and has been updated with new information.
