5 Semiconductor ETFs Picked by Financial Pros

AI is changing the face of the world.

And it’s all being powered thanks to cutting-edge semiconductors and hardware.

Companies like Nvidia (NVDA) have seen their stock skyrocket virtually unabated for months.

Demand for AI and computing has lifted semiconductor stocks to new all-time highs.

So, how are the financial pros playing this?

Most are looking beyond individual stocks at semiconductor ETFs.

While many in their top five searches are similar, iShares Philidelphia Semiconductor ETF (SOXX) came out on top not just this month but for most of the past year.

We’re diving into this investment vehicle so you can decide whether it’s right for your portfolio.

Key Facts About SOXX

• Net assets: $11.9 billion
• 12-month trailing yield: 0.73%
• Inception: July 10, 2001
• Expense ratio: 0.35%
• Number of holdings: 31

The SOXX is a pretty straightforward ETF. It mimics the NYSE Semiconductor Index, which measures the performance of the 30 largest U.S.-listed semiconductor companies. 

This includes businesses primarily involved in designing, distributing, manufacturing, and selling semiconductors.

The index includes mid- and large-cap stocks using a modified market-weighed approach.

Source: iShares

The modified market-weighted approach tends to cap the gains on larger companies, keeping them from dominating the index’s total weight.

That’s why you see Nvidia as one of the largest holdings, though not much larger than Advanced Micro Devices, despite the large gap in market caps between those two companies.

Source: iShares

Performance

The run in semiconductors isn’t a new phenomenon. 

As the performance chart shows below, the gains have accrued over the past decade.

Source: iShares

Notably, the gains in the last year are almost equal to those from three years ago.

This speaks to the highly volatile nature of the semiconductor industry.

Competition

The top five semiconductor ETF searches by financial pros offered some interesting results.

We found that modest changes in the investing structure yielded vastly different results over a 5-year period.

• VanEck Vectors Semiconductor ETF (SMH): Instead of 30, the SMH focuses on the top 25 U.S.-listed semiconductor companies, using a straight market-weighted approach. Hence, Nvidia makes up 25% of the portfolios total weight.
• SPDR S&P Semiconductor ETF (XSD): The XSD takes a more diversified approach with 40 companies employing an equal-weighted approach.
• First Trust Nasdaq Semiconductor ETF (FTXL): FTXL takes a slightly different approach, mirroring the NASDAQ U.S. Smart Semiconductor index. The index ranks companies on ROA, Gross Income, and momentum.
• Invesco Dynamic Semiconductors ETF (PSI): Similar to the FTXL, the PSI follows the Dynamic Semiconductor Intellidex Index, which invests in semiconductor companies, ranking them based on price and earnings momentum, quality, management action, and value.

This chart illustrates a point we see so often – simpler is better.

ETFs with more diversification tend to have lower returns than those that try to outsmart the market.

ETFs with a straightforward, market-cap-weighted methodology often do better in the long-run.

Our Opinion 9/10 

While the SOXX is a great ETF, we prefer the SMH for its simplicity and pure market-cap-weighted approach.

However, the SOXX provides plenty of liquidity, weekly options, and a slightly higher dividend yield.

Plus, if you believe semiconductors due for a correction, then the slightly higher diversification may provide some extra cushion against a pullback.

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