The semiconductor sector is a small but vitally important piece of the technology ecosphere. In a world dominated by social media and software conglomerates, it’s important to remember how hardware companies allow for these platforms to thrive. The recent outperformance of this industry group within the broader technology sector has promoted chip makers to the top of many momentum leaderboards to kick off 2018.
The largest exchange-traded fund that tracks this segment is the iShares PHLX Semiconductor ETF (SOXX). This fund has $1.6 billion dedicated to a concentrated group of just 30 semiconductor stocks domiciled in the United States. Top holdings in SOXX include well-known names such as NIVIDIA Corp (NVDA), Intel Corp (INTC), and Texas Instruments (TXN). The fund charges a net expense ratio of 0.48% to own this basket.
Its market-cap weighted structure means that the top ten holdings for SOXX account for most of the asset base. Roughly 60% of the portfolio is skewed towards larger corporations, which means they will have a significant pull on the performance of the fund.
That hasn’t been such a bad thing this year as SOXX has gained +15.61% to start 2018 and has jumped over 18% since the brief correction that bottomed in early February. The momentum behind this surge has allowed SOXX to break back above its prior high and demonstrate formidable strength relative to the broad market.
For those looking for a more equitable distribution of portfolio capital, the equal-weighted SPDR S&P Semiconductor ETF (XSD) is a competitive ETF offering in this genre. This fund identifies 35 stocks from within the S&P semiconductor sub-industry and allocates capital evenly to each underlying holding. The net effect is to promote greater contribution from smaller companies relative to their large-cap peers.
That index weighting criteria has led to meaningful outperformance of XSD versus the competition over the last year. The fund has gained +47.42% compared to +27.78% in SOXX during that time frame. XSD is also one of the lowest cost funds in this category with a net expense ratio of 0.35%.
There are also two smart beta funds in this category that select and weight their holdings according to strict factor criteria. The PowerShares Dynamic Semiconductors Portfolio (PSI) and First Trust Nasdaq Semiconductor ETF (FTXL) use fundamental screening characteristics to build their portfolios. PSI evaluates semiconductor companies based on price momentum, earnings growth, quality, and value scores. The end result is a basket of 30 stocks with an emphasis on smaller and mid-sized market capitalizations.
FTXL takes a similar tact by weighting stocks based on trailing 12-month trailing volatility, value metrics, and recent price appreciation criteria. The companies showing the highest scores in these factors are given the largest share of capital within the fund. Currently that distinction belongs to Micron Technology Inc (MU) and ON Semiconductor Corp (ON), which account for nearly 20% of the asset allocation.
It’s worth noting that many smart beta ETFs like PSI and FTXL are regularly evaluating and rebalancing their holdings on a quarterly basis. As such, the portfolio can shift over time more so than a traditional passive index.
The Bottom Line
Semiconductor ETFs may be appropriate for those investors who are seeking the companies demonstrating strong relative returns to the market and have recently broken out to new highs. These funds may be used to supplement traditional sector or broad market exposure to overweight a portfolio towards technology hardware manufacturers.