Best Semiconductor ETFs

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Contributor, Benzinga
July 3, 2023

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Semiconductors are becoming increasingly important as people enter an era defined by sophisticated technological advancements such as artificial intelligence (AI), cloud computing and big data, along with generous government incentives and subsidies for the industry. Together, these factors drive demand for more advanced semiconductors.

AI, with its immense processing requirements, has led to a surge in demand for high-performance chips that can handle complex deep learning and machine learning tasks. As more businesses migrate their operations to the cloud, the need for powerful semiconductors to support data centers further fuels demand.

Additionally, the proliferation of big data presents its own set of challenges, requiring advanced semiconductor hardware to process and analyze the vast quantities of data generated. The upshot of this is a growing demand for semiconductors that can handle these immense data workloads.

However, investing directly in individual semiconductor companies can present significant challenges given the complexities and volatility inherent to the industry. 

This is where semiconductor exchange-traded funds (ETFs) come into play. Compared to individual semiconductor stocks, semiconductor ETFs can offer much greater diversification, along with excellent liquidity and transparency. 

5 Best Semiconductor ETFs

The following U.S.-listed semiconductor ETFs rank among the most popular based on assets under management (AUM). Benzinga screened them for a sufficiently low expense ratio, trading volume and track record to ensure investors are looking at the best semiconductor ETFs. 

1. iShares Semiconductor ETF (NASDAQ: SOXX)

SOXX ranks among the most popular semiconductor ETFs with $8.8 billion in AUM as of June 28, 2023. The ETF tracks the ICE Semiconductor Index, which holds 30 of the largest U.S.-listed semiconductor stocks by market cap. The top holdings in SOXX include names like NVIDIA Corp. (NASDAQ: NVDA), Broadcom Inc. (NASDAQ: AVGO) and Advanced Micro Devices Inc. (NASDAQ: AMD). 

SOXX charges a 0.35% expense ratio and has a 22-year track record of performance dating back to July 10, 2001. Since its inception, the ETF has returned an annualized 10.39% as of May 31, 2023. It is one of the most heavily traded semiconductor ETFs in the U.S. market, with a 30-day average volume of around 1.3 million shares and a small median bid-ask spread of just 0.03%. 

2. VanEck Semiconductor ETF (NASDAQ: SMH)

A popular alternative to SOXX is SMH, which holds an edge in terms of size with around $9.2 billion in AUM as of June 28, 2023. This ETF tracks the MVIS US Listed Semiconductor 25 Index, which tracks both U.S. and foreign semiconductor stocks listed on a U.S. exchange like the Nasdaq or New York Stock Exchange. Because of its index, SMH’s portfolio favors the largest semiconductor stocks.

As of June 28, 2023, NVIDIA sits at the top of this ETF with an 18.76% weighting, followed by Taiwan Semiconductor Manufacturing Co Ltd. (NASDAQ: TSMC) at 11.50%. U.S. semiconductor stocks make up 79.19% of SMH, with Taiwan and the Netherlands trailing at 11.21% and 9.5% respectively. The ETF charges a 0.35% expense ratio, identical to that of SOXX. 

3. SPDR S&P Semiconductor ETF (NYSEARCA: XSD)

Both SOXX and SMH use a market-cap-weighted strategy, which assigns proportionately higher weights to larger semiconductor stocks like NVIDIA. However, this approach can lead to concentration risk in a small number of top holdings that end up dominating the ETF. An alternative here is XSD, which tracks the modified equal-weighted S&P Semiconductor Select Industry Index.

The 38 semiconductor stocks tracked by XSD are held in more or less equal weights, regardless of their market cap size. This ensures a more uniform distribution between large, mid-sized and small semiconductor stocks. However, XSD is smaller than the previous options, sporting just $1.5 billion in AUM as of June 28, 2023. The ETF also charges a 0.35% expense ratio, which makes it competitive in terms of fees. 

4. First Trust Nasdaq Semiconductor ETF (NASDAQ: FTXL)

FTXL’s index, the Nasdaq US Smart Semiconductor Index, introduces some additional steps when it comes to screening eligible semiconductor stocks. The methodology includes assessing a stock’s trailing 12-month return on assets, gross income and momentum, with the bottom 25% of eligible stocks eliminated. The remaining 30 to 50 stocks are weighted based on their trailing 12-month cash flow, subject to an 8% cap.

The approach used by FTXL goes beyond simple indexing, and it shows in the ETF’s higher expense ratio of 0.60%. Still, investors who believe that this methodology may result in outperformance over the long term compared to a more passive ETF like SOXX or SMH may prefer FTXL as a high-conviction holding. So far, FTXL has attracted around $1.1 billion in AUM since its inception date of Sept. 20, 2016. 

5. Invesco Dynamic Semiconductors ETF (NYSEARCA: PSI)

Another semiconductor ETF that employs a similar factor-based index as FTXL is PSI. This ETF tracks the Dynamic Semiconductor Intellidex Index, which screens eligible semiconductor stocks based on multiple factors, which include price momentum, earnings momentum, financial quality, management and valuation. Overall, PSI aims to track 30 U.S. semiconductor stocks.

As of May 31, 2023, PSI holds a five-star Morningstar rating out of 227 comparable funds for its 10-year returns, meaning that on an apples-to-apples basis, it has outperformed most of its peers in terms of risk-adjusted returns. However, keep in mind that this cannot be used to predict the ETF’s future returns. In terms of fees, PSI currently charges a 0.55% expense ratio.

5. Invesco PHLX Semiconductor ETF (NASDAQ: SOXQ)

Invesco’s other semiconductor ETF takes a more passive approach by tracking the well-known PHLX Semiconductor Sector Index. Instead of employing the elaborate screeners used by PSI, SOXQ’s approach is much more simple — the ETF holds the 30 largest U.S.-listed semiconductor companies weighted by their market capitalization. This gives the ETF a decidedly large-cap tilt. 

The holdings in SOXQ are very similar to that of SOXX and SMH, with NVIDIA and Broadcom sitting in the number one and two spots respectively, followed by Intel Corporation (NASDAQ: INTC) in third place. However, this ETF has been less popular than the previous options, with just $130 million in AUM as of June 28, 2023. It is the most affordable on this list with a 0.19% expense ratio. 

What is a Semiconductor ETF?

A semiconductor ETF is a type of investment fund that holds a basket of different semiconductor stocks based on an underlying index or its proprietary rules. Shares of these semiconductor ETFs trade on exchanges like stocks do, with their own ticker.

When investors buy a semiconductor ETF, they receive exposure to the risks and returns of the underlying basket of semiconductor stocks. In exchange, they pay an annual percentage fee, called the management expense ratio.

A simple way to think of semiconductor ETFs is as a ready-made portfolio of semiconductor stocks managed by a professional investment manager that can be traded like a stock.

Why Invest in Semiconductor ETFs?

Investing in semiconductor ETFs offers a unique opportunity for investors to gain exposure to the semiconductor industry, an essential and fast-growing sector powering different types of technological innovation, and one that is gaining increased attention today given advancements in AI. 

Semiconductors are an important input for nearly any product that incorporates complex electronics, which not only includes smartphones but also computers, electric vehicles and more. By investing in semiconductor ETFs, investors are positioning themselves in a vital part of the technology supply chain, which can benefit from growing demand. 

Investing in a semiconductor ETF reduces risk compared to investing in individual stocks because they offer diversified exposure to a range of companies within the sector. This way, even if one or two companies in the portfolio underperform, the impact on the overall investment is minimized. 

Finally, a semiconductor ETF allows investors to take advantage of the specialized knowledge of investment professionals who are experienced in choosing the most promising companies within the semiconductor industry. By buying a semiconductor ETF, investors can skip out on doing extensive research to find the best stock picks.

Best Online Brokers for Investing Semiconductor ETFs

Investors looking to research and choose the best semiconductor ETFs can use Benzinga to compare the available selections available on the market. Here is a list of brokers that support trading in semiconductor ETFs and offer research tools to help investors select the right one.

Frequently Asked Questions

Q

Does Vanguard have a semiconductor ETF?

A

As of June 29, 2023, Vanguard does not have a semiconductor ETF among its lineup of 82 ETFs. The closest ETF Vanguard has is the Vanguard Information Technology ETF (NYSEARCA: VGT), which holds some semiconductor stocks but has a broader technology sector focus to also include non-semiconductor stocks. 

Q

Is semiconductor ETF a good investment?

A

Semiconductor ETFs can be a good investment for risk-tolerant investors who are bullish on further rapid growth in the technology sector and wish to focus on solely semiconductors. However, like all investments, semiconductor ETFs come with risks, including market volatility, geopolitical tensions and supply chain disruptions. There is no guarantee that these ETFs will meet their investment objectives or outperform the broader technology sector or the overall market.

Q

Is there an ETF that tracks semiconductors?

A

There are many U.S.-listed ETFs that track semiconductor stocks. Any of the five ETFs profiled earlier will track semiconductor stocks, whether based on their own methodology or via an external benchmark index. Read a semiconductor ETF’s prospectus carefully to understand its strategy and underlying holdings. This practice will help you assess an ETF’s true degree of semiconductor involvement.

About Tony Dong

Tony Dong, MSc, CETF®, is a seasoned investment writer and financial analyst with a wealth of expertise in ETF and mutual fund analysis. With a background in risk management, Tony graduated from Columbia University in 2023, showcasing his commitment to continuous learning and professional development. His insightful contributions have been featured in reputable publications such as U.S. News & World Report, USA Today, Benzinga, The Motley Fool, and TheStreet. Tony’s dedication to providing valuable insights into the world of investing has earned him recognition as a trusted source in the finance industry. Through his writing, he aims to empower investors with the knowledge and tools needed to make informed financial decisions.