The semiconductor industry stands as one of the most critical and dynamic sectors in today's global economy. At the heart of this industry are powerhouse companies like Taiwan Semiconductor Manufacturing Company (TSMC), Nvidia, Broadcom (NASDAQ:AVGO), AMD (NASDAQ:AMD), Intel (NASDAQ:INTC), and ASML (AS:ASML).
These firms not only dominate semiconductor production but also significantly influence the industry's landscape through their exports and imports. The sector is further complicated by geopolitics, with sanctions against certain countries impacting the global semiconductor supply chain.
Parallel to these market dynamics are technological advancements, particularly in artificial intelligence (AI), which are driving an ever-increasing demand for processing power. GPU manufacturers are continually innovating to meet this escalating need, reflecting the sector's rapid evolution and growth.
Over the past decade, the semiconductor industry has emerged as a top performer within the broader technology sector. This is evidenced by recent blowout earnings reports and strong performances from companies like AMD and Nvidia, highlighting the sector's robust momentum and its critical role in powering technological advancement.
Given this backdrop, investing in semiconductor stocks through ETFs offers a liquid and affordable way to gain exposure to this pivotal industry. Here’s an overview of the three most popular semiconductor ETFs, ranked by assets under management (AUM) as per the ETF Central screener.
VanEck Semiconductor ETF (SMH)
SMH currently stands as the most popular semiconductor-focused ETF with an impressive $11.8 billion in assets under management.
The ETF follows a straightforward approach, tracking the MVIS US Listed Semiconductor 25 Index, which is a market capitalization-weighted index focusing on the largest and most liquid companies.
SMH's composition reflects the significant growth and market influence of its top holdings. Recently, Nvidia has become a standout within the ETF, now constituting over 21% of SMH's weight. The next largest holding, TSMC, accounts for 8.91%.
While Nvidia's recent surge has been beneficial to the ETF, allowing it to capture the gains from the company's strong performance, it also introduces a concentration risk. This means that in a market downturn, the ETF's heavy reliance on a single company could potentially lead to greater volatility.
One of the advantages of SMH, owing to its size, is its high liquidity. This is reflected in the low bid-ask spread and an active options chain, making it easier for investors to enter and exit positions. Additionally, the ETF comes with an expense ratio of 0.35%, which is reasonable for a sector-specific ETF.
iShares Semiconductor ETF (SOXX)
SOXX is another popular choice in the semiconductor ETF space and serves as a viable tax loss harvesting partner for SMH, thanks to their similar compositions but different underlying indexes.
SOXX tracks the NYSE Semiconductor Index, which consists of 30 holdings. Its portfolio is less top-heavy compared to SMH, offering a more balanced exposure across leading semiconductor companies. Notably, AMD, Broadcom Inc., and Nvidia each account for around 8.5% of the ETF’s weight.
However, potential investors should be aware that SOXX is still subject to significant volatility. This is evident in its 3-year beta of 1.51, indicating a higher volatility relative to the broader market. Additionally, the historical 3-year standard deviation stands at 32.84%, further highlighting the ETF's potential for large price swings.
Like SMH, SOXX benefits from high liquidity, characterized by a low 30-day median bid-ask spread of 0.03% and an active options chain. The ETF also sees a substantial average monthly trading volume of 933,000 shares, facilitating easier entry and exit for investors.
The expense ratio for SOXX is the same as SMH, at 0.35%, making it a competitively priced option for exposure to the semiconductor sector. Additionally, SOXX is tax-efficient, with a low 30-day SEC yield of 0.82%, which can be an appealing feature for investors mindful of tax implications.
SPDR S&P Semiconductor ETF (XSD)
For investors seeking to further diversify their exposure in the semiconductor sector and minimize concentration risk, the NYSE-listed XSD with $1.4 billion in AUM is an excellent option.
XSD tracks the S&P Semiconductor Select Industry Index, which employs a modified equal-weighted scheme. This methodology results in a more balanced distribution among its 39 holdings, unlike the top-heavier structures seen in some other semiconductor ETFs.
This equal-weighting approach not only ensures a fair representation across the spectrum of companies but also diminishes the impact of any single company on the ETF's overall performance.
An interesting aspect of XSD is its increased exposure to small and mid-cap semiconductor companies, which could present potential growth opportunities. This includes firms like Micro Technology, Lattice Semiconductor Corp, MaxLinear Inc., and Marvell Technology (NASDAQ:MRVL).
In terms of tax efficiency, XSD is comparable to its peers, offering a 0.25% 30-day SEC yield. Additionally, the expense ratio of XSD is identical to that of SMH and SOXX, standing at 0.35%.
This content was originally published by our partners at ETF Central.