Key Points
- For those looking to incorporate semiconductor growth, investing in an ETF focused on semiconductor companies is a more conservative approach than taking on single stock risk.
- SOXX has generated a 25.6% annualized return over the last 10 years and is a market-cap weighted portfolio of the 30 biggest U.S. companies that design, manufacture and distribute semiconductors.
- SMH focuses on chip production and equipment companies and has a 10-year return of 27.2%.
- 5 stocks we like better than iShares Semiconductor ETF
As has been the norm, traders wasted little time pouncing on the recent dip in semiconductor stocks. Last week, the PHLX Semiconductor index rallied 4.5% to a fresh all-time high, extending a rebound from its January 31 low. Over the past 12 months, the index is up 52%, more than twice the return of the S&P 500 over the same period.
Traders continue to pile into semiconductor names as the noise around the artificial intelligence (AI) revolution reaches a feverish pitch. With AI applications gaining traction in consumer, healthcare, industrial, retail and many other settings, demand for sophisticated microchips is rising.
Positive earnings surprises from Qualcomm, ARM Holdings and others have supported the 2024 chip stock rally. AI's potential to reinvigorate an industry recovering from a lengthy supply chain crisis is the key driver.
According to Grand View Research, the global AI market will grow 37.3% annually and reach $1.8 trillion by 2030. As machines harness the ability to think, how we work, learn and interact with technology could change dramatically.
Since hardware is the foundation of every AI application, semiconductor companies that supply AI-enabled computing, memory and networking solutions stand to bank huge profits.
But with the AI story singlehandedly driving U.S. stock indices to record highs, aren't semiconductor stocks too hot to touch right now?
Maybe. Maybe not.
Last week, the Semiconductor Industry Association (SIA) reported that global chip sales are projected to grow 13.1% in 2024, building off a strong 2023 second-half rebound. This implies that this year's sales will eclipse record levels from 2022 by more than $20 billion. More importantly, it suggests plenty of growth for companies that sell semiconductor materials, equipment and chips — not only for AI, but for uses in communications, defense, self-driving cars, robotics and many other areas.
There are many choices when it comes to incorporating semiconductor growth into an investment strategy. Riding long-term winners like NVIDIA, AMD and Broadcom has merit, but taking on single-stock risk isn't for everyone.
A more conservative approach is investing in an exchange-traded fund (ETF) focused on semiconductor companies. The challenge here is that most are expensive. Some are leveraged and, therefore, extremely high risk.
Thankfully, the MarketBeat ETF Screener helped us sift through some semiconductor-themed ETFs to uncover low-cost options.
iShares PHLX Semiconductor ETF
iShares PHLX Semiconductor ETF NASDAQ: SOXX tracks the closely watched Philadelphia Stock Exchange semiconductor index mentioned at the top of this article. As such, it is a market-cap-weighted portfolio of the 30 biggest U.S. companies that design, manufacture and distribute semiconductors.
Naturally, Nvidia is at the top of the holdings list and represents 10% of the fund, making SOXX a lower-risk way to gain exposure to the early AI winner, a stock that trades at almost 100x earnings.
The ETF has a 0.35% expense ratio, which is low compared to most semiconductor-focused funds. It also drops relative to the 25.6% annualized return the portfolio has generated over the last 10 years. With $12 billion in assets under management (AUM) and roughly one million shares traded daily, the iShares fund is highly liquid and has kicked off a 0.78% dividend over the last 12 months.
VanEck Semiconductor ETF
With $14.6 billion in assets, The VanEck Semiconductor ETF NASDAQ: SMH is even more popular than the SOXX fund. It's impressive considering its December 2011 inception, which makes it 10 years younger than SOXX. Although it has the same expense ratio (and, like SOXX, has an options chain), there are some differences.
The main difference is the index it seeks to replicate. SMH is based on the MVIS U.S.-listed Semiconductor 25 Index, focusing on chip production and equipment companies. This makes it a slightly more concentrated version of SOXX — but one that has performed very well.
The 10-year return is 27.2%, placing it second among all U.S. technology funds. As you might guess, the key source of outperformance is a heavy weighting in NVIDIA, which currently represents 24% of the fund. A significant position in international chip names like Taiwan Semiconductor and ASML Holding also accounts for performance differences and gives SMH more of a global flair.
Before you consider iShares Semiconductor ETF, you'll want to hear this.
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