Confirming strength in the technology sector, the tech-heavy Nasdaq-100 Index (NDX) and the Technology Select Sector Index are up 39.5% and 36.9%, respectively, year-to-date. In both cases, those margins are better than 2-to-1 over the S&P 500 and that’s with the S&P 500 allocating over 27% of its weight to the tech sector.
Those performances are testament to benefits of owning diverse tech ETFs, which include stocks such as Apple (AAPL) and Microsoft (MSFT). On the other hand, experienced investors that tech is comprised of a variety of industry groups and performance across those segments isn’t linear. That is to say some tech industries will outperform or lag the broader sector. In terms of 2023 tech industry standouts, semiconductors fit the bill.
The PHLX Semiconductor Sector Index, which is home to the 30 biggest U.S.-listed chip equities, is up nearly 38% year-to-date thanks to a big assist from the artificial intelligence (AI) phenomenon.
There’s no denying that AI – a recent development on the tech investing scene – is propelling chip ETFs as three of the five best-performing tech ETFs this year are semiconductor funds. Good news: 2023 isn’t a one-off showing for chip stocks and the related ETFs. This asset class has been a stellar long-term performer, indicating some of the following semiconductor ETFs could be attractive to patient tactical investors.
VanEck Semiconductor ETF (SMH)
Nearly 12 years old and home to $9.5 billion in assets under management, the VanEck Semiconductor ETF (SMH) is one of the oldest and largest funds in this category. More importantly, it’s up 41.55% year-to-date, but that’s not a flash-in-the-pan performance. Rather, SMH has been a stalwart over the long haul.
“Over a 10-year period, this share class outperformed the category’s average return by 10.3 percentage points annualized. It also outperformed the category index, the Morningstar US Technology Index, by an annualized 4.6 percentage points over the same period,” according to Morningstar research. “It is notable that this share class returned 36.9%, an impressive 19.4-percentage-point lead over its average peer, placing it in the top 10% of its category.”
SMH is home to 26 stocks, signaling a somewhat concentrated lineup. The two primary drivers of the ETF’s performance are Nvidia (NVDA) and Taiwan Semiconductor (TSM) as those two stocks combine for nearly a third of the fund’s roster.
Invesco Dynamic Semiconductors ETF (PSI)
While the Invesco Dynamic Semiconductors ETF (PSI) has been around for more than 18 years, it’s somewhat overlooked in the chip ETF conversation. That shouldn’t be the case because owing to a unique index methodology, PSI is a potentially attractive alternative to the standard funds in this category.
PSI follows the Dynamic Semiconductor Intellidex Index, which evaluates companies “based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value,” according to Invesco.
Data indicate that methodology has helped PSI build impressive long-term returns.
“Over the past five years, shares have returned an average of 20.4% per year, putting it in the 9th percentile of the category. For the last three years, the fund has returned an average of 22.6% a year, landing it in the 4th percentile. And for the past 12 months, the fund has been in the 9th percentile with a 35.5% gain,” adds Morningstar.
First Trust Nasdaq Semiconductor ETF (FTXL)
The First Trust Nasdaq Semiconductor ETF (FTXL) is another example of a chip ETF employing a unique strategy and one that’s rewarding investors as highlighted by a 26% year-to-date gain. Quietly large with $1.1 billion in assets under management, FTXL turned seven years old yesterday and tracks the Nasdaq US Smart Semiconductor™ Index.
Rather than weighting stocks by market value, which in chip ETFs can lead to concentration risk, FTXL’s index evaluates stocks based on trailing 12-month return on assets, trailing 12-month gross income and momentum as measured by price appreciation over the trailing 3-, 6-, 9-, and 12-month periods.
Currently home to 32 stocks, FTXL’s lineup has the flexibility to be as small as 30 components and as large as 50%. To somewhat reduce concentration risk, individual names are capped at weights of 8% upon inclusion in the underlying index.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Todd Shriber
Todd Shriber got his start in financial markets as a reporter with Bloomberg News. Later, he became a trader at a Southern California-based long/short hedge fund where he specialized in trading sector and international ETFs leading up to and during the financial crisis. He would later become the web editor at ETF Trends. Currently, he analyzes, researches and writes on ETFs for a variety of Web-based publications and financial services firms.Shriber has been quoted in the Barron's, CNBC.com and the Wall Street Journal. His work has been published on Web sites such as Benzinga, ETF Daily News, ETF Trends, MarketWatch, Fox Business and Nasdaq.com.
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