You might think that in the midst of an artificial-intelligence-fueled bull market, combined with the generous regulatory support from initiatives like the CHIPS and Science Act, a domestic semiconductor manufacturer like Intel Corp. (ticker: INTC) would be thriving.
Unfortunately, that’s not the case — year to date, shares of Intel are down 60%. Intel’s recent struggles serve as a prime example of strategic risk — the possibility that a company’s management may not be able to effectively execute its strategy, or that the strategy itself may be flawed.
On Aug. 1, Intel announced layoffs affecting 15,000 employees, representing 15% of its workforce, as part of a plan to reduce spending by $10 billion.
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Despite a surge in demand for semiconductors, Intel reported disappointing financial results, with an earnings per share (EPS) loss of $0.38 and stagnant second-quarter revenue of $12.8 billion, down 1% year over year. The company also suspended its quarterly dividend to improve cash flow sustainability.
If you invested in Intel expecting it to lead the American semiconductor renaissance, you likely would have been disappointed, especially considering how much better its rivals like Nvidia Corp. (NVDA) and Advanced Micro Devices Inc. (AMD) have performed.
The lesson here is clear: Taking on idiosyncratic risk by overweighting a single stock rarely pays off. Diversification within the semiconductor industry can protect you from such strategic missteps.
Instead of investing in a handful of individual semiconductor stocks, a more prudent approach is to buy an exchange-traded fund (ETF) that tracks the industry. ETFs offer the benefits of trading like a stock while providing built-in diversification, shielding you from the risks associated with any single company.
“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.
Here are seven of the best semiconductor ETFs to buy today:
| ETF | Expense ratio |
| Invesco PHLX Semiconductor ETF (SOXQ) | 0.19% |
| Invesco Semiconductors ETF (PSI) | 0.57% |
| First Trust Nasdaq Semiconductor ETF (FTXL) | 0.60% |
| VanEck Semiconductor ETF (SMH) | 0.35% |
| iShares Semiconductor ETF (SOXX) | 0.35% |
| SPDR S&P Semiconductor ETF (XSD) | 0.35% |
| KraneShares CICC China 5G & Semiconductor Index ETF (KFVG) | 0.65% |
Invesco PHLX Semiconductor ETF (SOXQ)
“Semiconductor demand remains on the upswing, driven by investments in generative AI from U.S. tech giants, with brisk demand for GPUs, high-bandwidth memory and chipmaking devices benefiting from increased capital investments in advanced semiconductors,” says Rene Reyna, head of thematic and specialty product strategy at Invesco. For semiconductor exposure, Invesco offers SOXQ.
This ETF passively tracks the PHLX Semiconductor Sector Index, a benchmark of the 30 largest U.S.-listed semiconductor companies. Top holdings in this ETF include Nvidia, Broadcom Inc. (AVGO), Advanced Micro Devices and Taiwan Semiconductor Manufacturing Co. Ltd. (TSM), which is technically a foreign company but is U.S.-listed. SOXQ is also one of the cheapest semiconductor ETFs, with a 0.19% expense ratio.
Invesco Semiconductors ETF (PSI)
The PHLX Semiconductor Sector Index tracked by SOXQ is designed to provide broad exposure to semiconductor stocks but does not screen for many other fundamental factors beyond market capitalization and which exchange a stock is listed on. If you want to invest in a semiconductor ETF with more stringent criteria, consider PSI, which tracks the Dynamic Semiconductor Intellidex Index.
“PSI screens its 30 holdings for factors like price momentum, earnings momentum, quality, management action and value in an attempt to outperform,” Reyna says. Every quarter in February, May, August and November, the ETF’s portfolio is rebalanced and reconstituted to add or drop holdings. However, the use of a more specialized and complex index methodology results in a higher 0.57% expense ratio.
First Trust Nasdaq Semiconductor ETF (FTXL)
PSI isn’t the only semiconductor ETF to screen its holdings based on fundamental factors. Its main competitor is FTXL, which tracks the Nasdaq U.S. Smart Semiconductor Index. This ETF ranks semiconductor stocks based on three main factors: trailing-12-months return on assets, trailing-12-months gross income and momentum in the form of historical price appreciation.
Once potential holdings are ranked, FTXL discards the bottom quartile companies and weights the remaining 30 to 50 eligible companies based on their trailing-12-months cash flow, subject to maximum and minimum portfolio weights of 8% and 0.5%, respectively. However, as with PSI, the use of a more elaborate indexing methodology results in a higher 0.60% expense ratio for FTXL.
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.” SMH is a great example of an ETF that scores well on all these.
This ETF tracks the MVIS U.S. Listed Semiconductor 25 Index, which has a similar methodology as the PHLX Semiconductor Sector Index but is more concentrated, with five fewer holdings. It is also much more top-heavy, with Nvidia and Taiwan Semiconductor Manufacturing accounting for 22% and 13.7% of its portfolio, respectively. SMH charges a 0.35% expense ratio.
iShares Semiconductor ETF (SOXX)
SOXX is one of the most popular semiconductor ETFs, with over $15 billion in assets under management. It is also one of the most liquid, with a 30-day average trading volume of 5 million shares, a median bid-ask spread of 0.03% and an options chain. As such, it tends to be a highly popular ETF for active traders looking to trade the sector’s high volatility and sensitivity to economic news.
The benchmark for SOXX is the NYSE Semiconductor Index, a market-cap-weighted index of 30 companies similar to the PHLX Semiconductor Sector Index. The top holdings currently include Broadcom, Nvidia, Advanced Micro Devices, Applied Materials Inc. (AMAT) and Qualcomm Inc. (QCOM). SOXX charges a 0.35% expense ratio, the same as SMH.
SPDR S&P Semiconductor ETF (XSD)
Market-capitalization-weighted benchmarks like the PHLX Semiconductor Sector Index and the MVIS U.S. Listed Semiconductor 25 Index tend to overemphasize mega-cap semiconductor companies like Nvidia and Broadcom. While this can help during a bull market, it can also expose investors to the same idiosyncratic risk that buying an ETF should have mitigated. The solution is an equal-weight ETF.
When it comes to semiconductors, the most popular equal-weight ETF is XSD, which tracks the S&P Semiconductor Select Industry Index. The 39 holdings in XSD are all assigned identical proportions during each rebalance, regardless of whether they are small-, mid- or large-cap. The median market cap for this ETF is $6.3 billion, giving it a strong mid-cap tilt. XSD charges a 0.35% expense ratio.
KraneShares CICC China 5G & Semiconductor Index ETF (KFVG)
“Amid rising geopolitical tensions, China is enhancing its domestic semiconductor production and artificial intelligence industry to reduce dependence on foreign technologies and bolster economic resilience,” says Derek Yan, senior investment strategist at KraneShares. To diversify away from American chipmakers, KraneShares offers KFVG, which tracks the CICC China 5G and Semiconductor Leaders Index.
The companies in KFVG won’t be familiar to most U.S. investors, but they are critical to China’s semiconductor industry. “For example, Cambricon Technologies, a leading developer of AI chips used in smartphones and servers, serves major clients like Huawei and Alibaba Group Holding Ltd. (BABA),” Yan notes. The ETF charges a 0.79% expense ratio, waived down to a net expense ratio 0.65%.
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Update 08/29/24: This story was previously published at an earlier date and has been updated with new information.
