The semiconductor industry has been the silent powerhouse behind the exponential growth in technology over the past decade. These tiny chips, the brains of modern electronics, are instrumental in everything from smartphones and computers to cars and home appliances.
“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.
For laypersons, understanding how these semiconductors work is simple: They control the flow of electrical currents in devices, enabling the processing of data, and powering the digital world as we know it. If it’s online and requires computing power, it depends on semiconductors.
“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.
Today, the industry is poised for even more growth. In a groundbreaking development, researchers have successfully created a functional semiconductor from graphene, marking a significant leap from traditional silicon-based chips. This new material promises greater efficiency and processing power, potentially revolutionizing the sector.
[Sign up for stock news with our Invested newsletter.]
“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.
This ongoing evolution of the semiconductor industry is not just a boon for the behemoths of chip manufacturing with ample war chests, but also for smaller, nimble chipmakers who have the agility to adapt quickly to these advancements.
The competitive nature of this industry drives a constant reinvestment in research and development, as companies vie to maintain or gain a technological edge.
However, it’s important to note that not all semiconductor companies will thrive in this rapidly evolving landscape. While some, like Nvidia Corp. (ticker: NVDA), have so far emerged as clear frontrunners due to their involvement in the AI arms race, identifying these winners is often only apparent in hindsight.
To navigate this uncertainty and minimize the risk of regret, investors can turn to semiconductor industry exchange-traded funds, or ETFs. These funds typically track external benchmark indexes that encompass a wide cross section of major semiconductor companies.
By investing in semiconductor ETFs, you gain broad exposure to the industry without the need to pick individual winners. This diversified approach spreads out the risk and allows investors to benefit from the collective progress of the sector.
Here are seven of the best semiconductor ETFs to buy in 2024:
| ETF | Expense ratio |
| VanEck Semiconductor ETF (SMH) | 0.35% |
| iShares Semiconductor ETF (SOXX) | 0.35% |
| Invesco PHLX Semiconductor ETF (SOXQ) | 0.19% |
| Invesco Semiconductors ETF (PSI) | 0.57% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% |
| Direxion Daily Semiconductor Bull 3X Shares (SOXL) | 0.94% |
| 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,” says Sean August, CEO of August Wealth Management Group. Case in point, SMH has returned an annualized 24.9% over the trailing 10 years as of Dec. 31, 2023.
By tracking the MVIS U.S. Listed Semiconductor 25 Index, SMH focuses on the largest and most liquid semiconductor stocks. Top holdings currently include both domestic and foreign names like Nvidia, Taiwan Semiconductor Manufacturing Co. Ltd. (TSMC), Broadcom Inc. (AVGO), Advanced Micro Devices Inc. (AMD), Intel Corp. (INTC) and ASML Holding NV (ASML). SMH charges a 0.35% expense ratio.
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.” For an ETF that scores well on all these metrics, consider SOXX.
With over $10 billion in assets under management, or AUM, SOXX is one of the largest and most popular semiconductor ETFs. It is also very liquid, with a 30-day average volume of just under a million shares traded and a small bid-ask spread of 0.03%. Its index, the NYSE Semiconductor Index, features a composition and holdings similar to SMH. SOXX also charges a 0.35% expense ratio.
Invesco PHLX Semiconductor ETF (SOXQ)
“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 capitalize on this long-term tailwind, investors can buy SOXQ.
While not as large as SMH or SOXX in terms of AUM, SOXQ has a distinct advantage when it comes to cost. With an expense ratio of 0.19%, an investor buying SOXQ can expect to pay around $19 in annual fees for a $10,000 investment, compared to 0.35% or $35, for SMH and SOXX. SOXQ’s benchmark, the PHLX Semiconductor Sector Index, is very similar to SOXX and SMH.
Invesco Semiconductors ETF (PSI)
The indexes tracked by SMH, SOXX and SOXQ are fairly passive in that they only attempt to identify the largest semiconductor stocks and weight them based on their market capitalization. For a more stringent approach, Invesco offers PSI, which tracks the Dynamic Semiconductor Intellidex Index. While pricier with a 0.57% expense ratio, this ETF also provides more advanced screening.
“The index seeks to go beyond traditional measurements to consider the fundamentals that drive healthy companies and growth,” Reyna says. “PSI screens its 30 holdings for factors like price momentum, earnings momentum, quality, management action and value in an attempt to outperform.” This makes the ETF an example of a “smart beta” fund that weighs metrics other than market cap.
[READ: 6 of the Best AI ETFs to Buy Now]
SPDR S&P Semiconductor ETF (XSD)
Market-capitalization-weighted semiconductor index ETFs like SMH, SOXQ and SOXX will naturally feature a higher allocation toward the largest semiconductor companies. When certain companies like Nvidia grow quickly, their weighting in these ETFs can quickly become overwhelming. For instance, as of Jan. 10, Nvidia accounts for 22% of SMH’s portfolio.
While this can benefit investors when top holdings perform well, it can also hurt them in a downturn. For a more balanced approach, semiconductor investors can opt for XSD instead. This ETF employs a modified equal-weighted index, which places greater emphasis on small- and mid-cap semiconductor stocks potentially poised to grow more. XSD also charges a 0.35% expense ratio.
Direxion Daily Semiconductor Bull 3X Shares (SOXL)
Semiconductor ETFs are already quite volatile compared to their broad market peers. For example, SOXL currently has a three-year beta of 1.5 as of Nov. 30, 2023. This implies that on average, the ETF is one-and-a-half times as sensitive to market fluctuations compared to the S&P 500 index. This can be an advantage for short-term traders, who rely on high volatility to make their returns.
For even more magnified exposure, traders can utilize a leveraged ETF like SOXL. By using derivatives called swaps, this ETF attempts to deliver a daily return three times that of the NYSE Semiconductor Index. However, the leveraged exposure is only intended to be accurate for a single day, as longer holding periods can compound unpredictably. SOXL is also expensive, with a 0.94% expense ratio.
GraniteShares 1.5X Long NVDA Daily ETF (NVDL)
What if you’re looking for magnified exposure to a single notable semiconductor stock, such as Nvidia, in anticipation of a positive earnings report? Traditionally, investors would be limited to either leveraging via portfolio margin or using call options. Both of these strategies have distinct risks, such as the prospect of margin calls or time decay, called Theta, which could lead to suboptimal outcomes.
As an alternative, investors can consider single-stock ETFs. As their name suggests, these ETFs provide leveraged exposure to the daily returns of a single stock. In the case of NVDL, its benchmark is one-and-a-half times the daily performance of Nvidia’s common shares. As with all leveraged ETFs, long-term results can differ greatly due to compounding. NVDL charges a 1.15% expense ratio.
More from U.S. News
7 of the Best Growth Funds to Buy and Hold
7 Best Semiconductor ETFs to Buy in 2024 originally appeared on usnews.com
Update 01/11/24: This story was previously published at an earlier date and has been updated with new information.
