VettaFi Voices On: Targeting Semiconductors in Tech Investing
The technology sector is on a tear again, rebounding mightily in the first half from its devastating year in 2022. The Technology Select Sector SPDR Fund (XLK) up about 40% year-to-date and has almost reached its levels at the end of 2021. However, it’s a volatile sector, and the semiconductor industry in particular is growing in importance. The VettaFi Voices tackled the topic of getting exposure to the semiconductor industry. Should investors be overweighting semiconductors since they underlie almost every aspect of technology at this point? What risks are associated with them? How can investors get exposure? Todd Rosenbluth, head of ETF research: I want to start with some level setting. If you own broad traditional technology ETFs, you own semiconductors. The semiconductor and semiconductor equipment industry is the second-largest in XLK, representing 27% of assets. This is just behind software (38%). NVIDIA and Broadcom are the third- and fourth-largest stocks, though notably smaller weights than Apple and Microsoft. Meanwhile, the Invesco S&P 500 Equal Weight Technology ETF (RSPT) has more exposure to semis and semi equipment due to its equal-weighted approach. The industry was the largest at 34% of assets, while software is 27%. Love the new ticker by Invesco, by the way. So if you already own one of these of similar ETFs, you own semiconductors. If you want more exposure, there are some strong choices with notable differences. There are more concentrated ETFs, like the iShares Semiconductor ETF (SOXX) and the VanEck Semiconductor ETF (SMH) , that are heavily weighted to the large-cap stocks. SOXX has 12% of assets in NVIDIA, for example, and nearly 10% in Broadcom. Meanwhile, the SPDR S&P Semiconductor ETF (XSD) is equally weighted and has more exposure to the small-cap companies. A company I’m not familiar with, Credo Technology, is actually a larger position than NVIDIA. Meanwhile, Ambarella and Rambus are other top-10 positions. The more mega-cap-focused SOXX was up 49% this year, beating XSD by more than 1,500 basis points. But over a three-year period, XSD has been the stronger performer. Semiconductor Stocks in Thematic ETFs Roxanna Islam Swan, associate director of research: There’s a lot to support semiconductors right now, especially with investors excited about AI. And when you look at almost any thematic ETF that focuses on disruptive tech, semiconductors are usually in the top holdings ( future mobility , for instance). Did you know that a modern car requires somewhere between 1,000–3,000 semiconductor chips? It’s a cool fact. It’s also why things got tough during the pandemic when we were hit with supply chain disruptions. Looking forward, that maybe won’t be as bad with the CHIPS Act and reshoring. But chips still will be more sensitive to inventory cycles compared to something like software, which is seen as less cyclical. So while there could be value in overweighting semiconductors, I don’t think it hurts to diversify with broader tech — especially since there are other large tech trends right now, like cloud computing. Rosenbluth: Good point. Semiconductor companies are part of thematic ETFs, not just sector and industry ETFs. I know people will read your related recent article, but can you cite a couple of examples? Semiconductors & Growth Potential Islam: A lot of thematic ETFs focus on themes that are still in their early stages with high growth potential. This is why a lot of them have a large allocation to enabling technology. For many themes, this includes semiconductors. For example, the largest future mobility ETF is the Global X Autonomous & Electric Vehicles ETF (DRIV) . It has a 21% weighting in semiconductor stocks, and NVIDIA is its largest holding. Other future mobility ETFs have an even higher allocation to semiconductor stocks. The Fidelity Electric Vehicles and Future Transportation ETF (FDRV) and the First Trust S-Network Future Vehicles & Technology ETF (CARZ) have 33% and 38% weights, respectively. The largest video gaming ETF, the VanEck Video Gaming and eSports ETF (ESPO) , has 21% weight in semiconductors, and its top two holdings are NVIDIA and AMD. Rosenbluth: Love the thematic ETF tickers! I mentioned the more industry-focused ETFs earlier and wanted to note the Invesco Dynamic Semiconductors ETF (PSI) . It’s not equally weighted like XSD, but it is a smart beta ETF. It combines factors like price momentum, value, and quality. It’s an index-based approach that seems more like active management since it is rebalanced quarterly. NVIDIA is largest holding but only at 6%. Taiwan Semiconductor Exposure Heather Bell, managing editor: The technology sector […]
