One of the most eagerly awaited market events began this week on Monday: semiconductor giant Nvidia Corp’s (ticker: NVDA) GTC AI conference.
The event boasts a highly anticipated keynote by Nvidia CEO Jensen Huang, as well as 900 sessions, 300 exhibits and 20 technical workshops focusing on generative artificial intelligence, or AI.
The anticipation for this conference has been fueled further by Nvidia’s recent exceptional earnings report, which showcased significant growth largely attributed to demands from advancements in AI.
In February, Nvidia reported a record quarterly revenue of $22.1 billion, marking a 22% increase from the previous quarter and a 265% rise from the previous year.
Data center revenue alone hit $18.4 billion, up 27% from the previous quarter and up 409% from the previous year, contributing to a record full-year revenue of $60.9 billion — an increase of 126%.
“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.
“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, amid Nvidia’s meteoric rise, it’s wise for investors to recall the cautionary tale of Cisco Systems Inc. (CSCO) during the late-1990s dot-com bubble. Despite Cisco’s survival and its role in pioneering technologies that shaped the internet’s infrastructure, investors who purchased its shares at peak valuations faced years of losses.
To avoid similar pitfalls, investors might consider diversifying their bets across the semiconductor industry. Competitors such as Advanced Micro Devices (AMD), Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), ASML Holdings NV (ASML) and Broadcom Inc. (AVGO) represent potential future leaders in this space that could potentially dethrone Nvidia.
Investing in semiconductor exchange-traded funds, or ETFs, offers a way to circumvent the risky endeavor of predicting individual winners. Instead, it allows investors to bet on the sector’s overall long-term growth, benefiting from the collective success of companies, including and beyond Nvidia.
“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.
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Here are seven of the best semiconductor ETFs to buy today:
| Semiconductor 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% |
| First Trust Nasdaq Semiconductor ETF (FTXL) | 0.60% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% |
| ProShares Ultra Semiconductors ETF (USD) | 0.95% |
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.” A semiconductor ETF that meets all these requirements is SMH.
By tracking the MVIS US Listed Semiconductor 25 Index, SMH focuses on the largest and most liquid U.S. semiconductor stocks, weighted by market capitalization. With a low 0.01% 30-day median bid-ask spread, this ETF is easy to trade. It charges a 0.35% expense ratio, which is reasonable for industry-specific ETFs and is also very tax-efficient with a low 0.4% 30-day SEC dividend yield.
iShares Semiconductor ETF (SOXX)
One criticism of SMH is that the ETF is currently very top-heavy. As of March 14, 27.6% of SMH’s holdings are concentrated in Nvidia. For a more balanced approach to the sector, investors can consider SOXX, another popular semiconductor ETF with more than $12.4 billion in assets under management. It charges the same 0.35% expense ratio as SMH does and also has a low, tax-efficient 0.7% 30-day SEC yield.
SOXX’s benchmark is the NYSE Semiconductor Index, which also features Nvidia as a top holding but at a much lower weight of 8.8%. After Nvidia come Advanced Micro Devices and Broadcom at around 7.9% and 7.6%, respectively. Unlike SMH, SOXX’s allocation to international companies like Taiwan Semiconductor Manufacturing and ASML is also lower. Traders, hedgers and speculators alike will also be happy to know that options are available to trade on this ETF.
Invesco PHLX Semiconductor ETF (SOXQ)
“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 a low-cost way to invest in semiconductors, Invesco offers SOXQ at a 0.19% expense ratio.
This ETF tracks the PHLX Semiconductor Sector Index, which targets the 30 largest U.S.-listed semiconductor companies weighted by market capitalization. With around $339 million in assets under management (AUM), the SOXQ isn’t as popular as SMH or SOXQ, but it is backed by a reputable fund manager and tracks a notable industry index. As with SMH and SOXX, investors can also expect a tax-efficient 30-day SEC yield, which clocks in at 0.8%.
[READ: 10 Best Investments for 2024]
Invesco Semiconductors ETF (PSI)
“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 capture these tailwinds, Invesco also offers PSI.
“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.” That said, these more active screeners cause the ETF to have a higher expense ratio of 0.57%.
First Trust Nasdaq Semiconductor ETF (FTXL)
FTXL is another example of a semiconductor ETF that goes beyond simply weighting its holdings by market capitalization. To be eligible for inclusion, semiconductor stocks from the broader Nasdaq US Benchmark Index are scored based on three factors: trailing 12-month return on assets, trailing 12-month gross income and momentum. Each of these is measured in the form of three-, six-, nine- and 12-month price appreciation.
After aggregating the scores for each metric and ranking the stocks, FTXL eliminates the bottom quartile and then weights the remaining 30-50 companies based on their 12-month trailing cash flow, with a maximum cap of 8%. However, investors should note that this ETF’s more complicated methodology does result in a higher 0.6% expense ratio and more frequent turnover.
SPDR S&P Semiconductor ETF (XSD)
Market-capitalization-weighted ETFs like SMH can incur significant concentration risk if a handful of their holdings are significantly larger than the others. SMH’s 27.6% allocation to Nvidia is a result of the company’s current $2.2 trillion market capitalization is a case in point. For a more balanced approach, investors can opt for an equal-weighted ETF like XSD instead.
The S&P Semiconductor Select Industry Index tracked by XSD currently has a total of 39 holdings, all of which are assigned an equal weighting whenever the ETF rebalances. This ensures a greater emphasis to small- and mid-cap semiconductor stocks but can also result in higher portfolio turnover. Investors can expect a 0.35% expense ratio and a tax-efficient 0.2% 30-day SEC yield.
ProShares Ultra Semiconductors ETF (USD)
Traders looking for enhanced exposure to U.S. semiconductor stocks without the use of margin or options can consider a leveraged ETF like USD. This ETF uses derivatives called swaps to target a daily return two times that of the Dow Jones U.S. Semiconductors Index. If the underlying index rises by 1%, USD will target a 2% daily return, but also should decline by twice as much on days when the index falls.
ProShares cautions that leveraged ETFs like USD are not intended for a buy-and-hold strategy, as the leverage mechanics can result in unpredictable compounding over longer periods. This ETF is also highly volatile, as it essentially doubles the movements of an already sensitive industry. Due to the use of derivatives, USD also charges a much higher 0.95% expense ratio.
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7 Best Semiconductor ETFs to Buy in 2024 originally appeared on usnews.com
Update 03/18/24: This story was published at an earlier date and has been updated with new information.
