Even in the face of persistent high interest rates, the U.S. tech sector, significantly propelled by semiconductors, has consistently outperformed this year.
The semiconductor industry has emerged as a key driver of growth, particularly with Nvidia's remarkable journey to a $1 trillion market cap and the relentless buzz around AI.
Semiconductors are integral components in virtually all modern electronics, powering everything from smartphones to sophisticated AI systems. These companies vary in their focus, with some specializing in design and others in manufacturing, but all contribute essential elements to the tech ecosystem.
They are much like the suppliers of picks and shovels during the gold rush era - indispensable to the industry's success and highly profitable for investors so far.
While the U.S. boasts a plethora of semiconductor ETFs offering diverse exposure to this dynamic sector, the Canadian market presents far fewer options. According to the Cboe ETF screener, there are precisely two main semiconductor ETFs available to Canadian investors.
Here's a breakdown of each one, tailored for new investors looking to navigate this niche yet vital sector.
iShares Semiconductor Index ETF (TSX:XCHP)(XCHP)
Investors wishing to only target the U.S. semiconductor industry may prefer XCHP. This ETF tracks the NYSE Semiconductor Index, which currently consists of just 30 holdings. It is a fairly new ETF, having debuted on September 6th, 2023, with just $2.4 million in assets as of November 27th.
The ETF is fairly top-heavy – the five largest holdings (AMD (NASDAQ:AMD), AVGO, INTC, NVDA, and TXN) collectively account for around 38% of the ETF's portfolio. The management fee is set at 0.35%, which is fairly average for a niche industry-specific ETF. The expense ratio is yet to be determined as it is a new ETF.
However, keep in mind that this ETF is not hedged to the Canadian dollar. That is, fluctuations in exchange rates between the Canadian and U.S. dollar may add additional volatility for investors, which can be good if the U.S. dollar appreciates, or bad if the Canadian dollar appreciates.
Horizons Global Semiconductor Index ETF (TSX:CHPS)(CHPS)
The semiconductor industry doesn't just end as U.S. listed companies. By adopting a U.S.-only focus, prospective semiconductor investors miss out on international giants like Taiwan Semiconductor Manufacturing Co Ltd and ASML Holding (AS:ASML) NV. To solve this, Horizons ETFs offers CHPS.
This ETF tracks the Solactive Capped Global Semiconductor Index, which as its name suggests has a globally diversified focus. Around 65% of CHPS is held in U.S. stocks, with Taiwan and the Netherlands coming in second and third at around 13% and 10% respectively.
Still, the ETF is fairly top-heavy, with the five largest holdings accounting for 44% of the ETF's weight. While it is better capitalized with around $43 million in assets, investors can also expect a higher management fee of 0.45%, which after other costs comes to an expense ratio of 0.64%.
Are these Semiconductor ETFs Worth It?
For Canadian investors considering exposure to the semiconductor industry, the XCHP and CHPS offer convenient options.
However, some investors may have concerns about these ETFs, particularly regarding their higher fees, lower assets under management (AUM), shorter track records, and the potential risks of poor liquidity and fund closure.
Regarding liquidity, both XCHP and CHPS invest in large-cap, heavily traded semiconductor stocks, which typically ensures adequate liquidity, especially for those using limit orders. This means that despite the smaller size of these funds, investors should generally be able to buy and sell shares without significant issues related to liquidity.
The risk of ETF closure, however, is a valid concern. Generally, ETFs need to attract around $50 million in AUM to remain viable in the long term. Currently, both XCHP and CHPS are below this threshold, though it's worth noting that XCHP is relatively new to the market. Investors should monitor these funds for changes in their AUM, as a failure to grow could increase the risk of closure.
Despite these concerns, these Canadian-listed semiconductor ETFs offer significant convenience over their U.S.-listed counterparts, particularly regarding currency conversion. Investing in U.S.-listed ETFs typically involves converting Canadian dollars to U.S. dollars, which can incur additional costs due to exchange rate fluctuations and transaction fees.
By choosing Canadian-listed ETFs, investors can avoid these costs, making XCHP and CHPS attractive options for those looking to invest in semiconductors without the added complexity and expense of currency conversion.
This content was originally published by our partners at the Canadian ETF Marketplace.