In his 2022 book, “Chip War: The Fight for the World’s Most Critical Technology,” author Chris Miller highlighted a crucial vulnerability in the global semiconductor supply chain, with significant implications for the U.S. as a modern superpower.
He points out that a significant portion of the world’s semiconductor manufacturing capability is concentrated outside the U.S.: 37% of the world’s new computing power is produced by chips from Taiwan, 44% of global memory chips are produced by two Korean companies, and all of the world’s extreme ultraviolet lithography machines, crucial for manufacturing advanced chips, are produced by Dutch company ASML Holdings NV (ticker: ASML).
Miller argued that the current concentration of semiconductor production and critical technology in foreign hands poses a strategic risk for the U.S., akin to but potentially even more impactful than OPEC’s 40% share of world oil production.
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Essentially, if the U.S. does not control these essential elements of semiconductor manufacturing, it risks falling behind in technological innovation and economic power, underscoring the necessity for domestic development and production of semiconductors to maintain its status as a global leader.
The critical role of these chips came into public focus with the enactment of the Creating Helpful Incentives to Produce Semiconductors and Science Act of 2022, or CHIPS Act, on Aug. 9, 2022. This bipartisan act earmarked $280 billion in funding over the next decade to reinforce the U.S. semiconductor sector.
A lion’s share — $200 billion — was reserved for scientific research and development and commercialization, while $52.7 billion supported semiconductor manufacturing, R&D, and workforce development. An additional $24 billion in tax credits was designated for enhancing chip production.
This legislative push was a response to a decline in domestic semiconductor production, with the U.S. producing only 12% of the world’s semiconductors today, compared to 37% in the 1990s.
Today, the deployment of the CHIPS Act’s resources is well underway, with notable investments including a $6.6 billion grant to Taiwan Semiconductor Manufacturing Co. Ltd. (TSM) for a major new facility in Phoenix, and an $8.5 billion grant to Intel Corp. (INTC) as part of efforts to re-shore semiconductor manufacturing in the U.S.
This comes amid rising geopolitical tensions, especially with China, which is making strides in semiconductor R&D to circumvent U.S. export restrictions. A notable example of this was a recent $1.7 billion investment by Huawei, which also recruited former ASML employees to boost its capabilities.
For investors, the enduring secular tailwinds for semiconductors are therefore not just driven by artificial intelligence, or AI, demand but also by substantial government initiatives, re-shoring efforts and the strategic importance of maintaining and advancing chip manufacturing capabilities amid global supply chain and geopolitical complexities.
Here are seven of the best semiconductor exchange-traded funds, or ETFs to buy today:
| ETF | Expense ratio |
| iShares Semiconductor ETF (SOXX) | 0.35% |
| VanEck Semiconductor ETF (SMH) | 0.35% |
| Invesco PHLX Semiconductor ETF (SOXQ) | 0.19% |
| Invesco Semiconductors ETF (PSI) | 0.57% |
| First Trust Nasdaq Semiconductor ETF (FTXL) | 0.60% |
| Strive U.S. Semiconductor ETF (SHOC) | 0.40% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% |
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 August Wealth Management Group. For example, SOXX has returned an annualized 25.3% over the trailing 10-year period.
This ETF tracks the NYSE Semiconductor Index, which targets 30 U.S.-listed domestic semiconductor companies. Currently, the top five holdings are Nvidia Corp. (NVDA), Broadcom Inc. (AVGO), Qualcomm Inc. (QCOM), Advanced Micro Devices Inc. (AMD) and Micron Technologies Inc. (MU). SOXX charges a 0.35% expense ratio, or around $35 in annual fees for a $10,000 investment.
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.” For an ETF that ticks all these boxes, consider SMH.
SMH tracks the MVIS U.S. Listed Semiconductor 25 Index, which focuses on the largest and most liquid semiconductor stocks. Currently, it is very top-heavy, with Nvidia sitting at a 20.2% weight. However, unlike SOXX, the ETF includes a much higher allocation to foreign semiconductor companies like TSM and ASML Holdings at 12.6% and 5%, respectively. SMH charges a 0.35% expense ratio.
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 of tracking this industry, Invesco offers SOXQ at an affordable 0.19% expense ratio.
This ETF tracks the PHLX Semiconductor Sector Index, which focuses on the 30 largest U.S.-listed semiconductor companies. The top eight holdings in SOXQ include all the aforementioned stocks found in both SOXX and SMH, along with the addition of Intel. With an average return on equity of 31.6%, the companies in SOXQ have been effectively using their capital to generate profits.
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.” These dollars will directly flow into the coffers of semiconductor companies.
Investors can also buy PSI, which tracks the Dynamic Semiconductor Intellidex Index. “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.” PSI charges a 0.57% expense ratio.
[READ: 10 Best Tech Stocks to Buy for 2024]
First Trust Nasdaq Semiconductor ETF (FTXL)
PSI isn’t the only semiconductor ETF to use a more complex index methodology. Another great example is FTXL, which tracks the Nasdaq U.S. Smart Semiconductor Index. This index employs a quantitative methodology to select semiconductor stocks based on trailing 12-month return on assets, trailing 12-month gross income, and momentum based on three-, six-, nine-, and 12-month price appreciation.
Once the initial portfolio of eligible stocks is selected, FTXL’s index ranks them based on a score aggregated from the above-noted factors, eliminating the bottom quartile. Then, the remaining 30 to 50 stocks are weighted based on their trailing 12-month cash flow, with a maximum cap of 8% and minimum weight of 0.5%. However, this ETF is the most expensive on this list, with a 0.6% expense ratio.
Strive U.S. Semiconductor ETF (SHOC)
A relatively new entrant to the semiconductor ETF landscape is SHOC, which debuted on Oct. 6, 2022. This ETF was launched by Strive Asset Management, which made headlines when co-founder Vivek Ramaswamy resigned in February 2023 to focus on his presidential candidacy. Previously, the firm garnered attention for its focus on shareholder primacy over ESG considerations.
SHOC passively tracks the Bloomberg U.S. Listed Semiconductors Select Total Return Index, offering exposure to many of the same companies found in SOXX and SMH for a 0.4% expense ratio. However, it does hold a high 26.3% concentration in Nvidia. As with most Strive ETFs, SHOC’s portfolio team will proactively engage with the management of its underlying companies via proxy voting.
SPDR S&P Semiconductor ETF (XSD)
The recent streak of outperformance from Nvidia has led to its high concentration in some market-cap-weighted semiconductor ETFs. For instance, SMH currently allocates 20.2% to Nvidia, while SHOC weights Nvidia even higher at 26.3%. Due to this, there is a risk that Nvidia’s performance may dwarf the other companies in these ETFs, leading to less-than-representative performance of the sector.
To mitigate this risk, investors can buy XSD, which tracks the S&P Semiconductor Select Industry Index. Unlike the previous ETFs, XSD is equal-weighted. During each rebalance, all 39 of the companies in XSD are allocated the same weight. This results in a much greater exposure to small- and mid-cap semiconductor companies. XSD charges a 0.35% expense ratio.
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7 Best Semiconductor ETFs to Buy in 2024 originally appeared on usnews.com
Update 04/16/24: This story was previously published at an earlier date and has been updated with new information.
