Tony's ETF Buyer's Guide: Semiconductor ETFs

SMH ETF: A semiconductor ETF with big names focus

If your investment strategy leans towards gaining market-cap-weighted exposure to the most dominant U.S.-listed semiconductors, then SMH should be at the top of your list.

This ETF follows the MVIS US Listed Semiconductor 25 Index, which, as the name suggests, includes the top 25 highly liquid semiconductor companies, weighted by market cap. This approach naturally favors the largest companies, placing them at the top of the portfolio.

A key feature of SMH is its inclusion of U.S.-listed companies, encompassing both domestic firms and foreign companies that are listed on U.S. exchanges. This broadens the ETF's exposure to global semiconductor leaders, not just those based in the United States.

The top holdings in SMH underscore its focus on industry heavyweights, showcasing a significant allocation to Nvidia Corp, which alone makes up 25.83% of the ETF's weight as of February 28, 2024.

Other notable holdings include Taiwan Semiconductor Manufacturing Co Ltd, Broadcom Inc, Advanced Micro Devices Inc, Asml Holding Nv, Applied Materials Inc, Lam Research Corp, Qualcomm Inc, and Intel Corp.

With an expense ratio of 0.35%, SMH aligns with the standard cost for ETFs in this sector. Investors interested in a market cap-weighted approach to semiconductor investing, particularly those looking to capitalize on the sector's giants, will find SMH an attractive option.

SOXX ETF: A semiconductor ETF for options traders

If your investment strategy includes buying or selling calls and puts or engaging in more complex multi-leg options strategies, SOXX stands out as the semiconductor ETF to consider. SOXX tracks the NYSE Semiconductor Index, featuring 30 holdings weighted by market cap.

A distinctive advantage of SOXX is its well-developed options chain, which offers a wide array of strike prices and expiration dates, accompanied by lower spreads on options and higher open interest. This makes it particularly appealing for investors looking to employ options strategies within the semiconductor sector.

Unlike SMH, SOXX's portfolio is much less top-heavy. Nvidia, for instance, represents only 10% of the ETF, which indicates a more balanced allocation among its holdings.

Other significant holdings in SOXX include Advanced Micro Devices Inc, Broadcom Inc, Qualcomm Inc, Intel Corp, Applied Materials Inc, Lam Research Corp, KLA Corp, Marvell Technology Inc, and ASML Holding ADR, reflecting a diversified exposure across the information technology sector.

SOXX maintains the same 0.35% expense ratio as SMH, ensuring cost-effectiveness for investors. Additionally, its tax efficiency is underscored by a low 0.74% 30-day SEC yield, making it an attractive option for those looking to incorporate options trading into their semiconductor sector investments.

XSD ETF: A semiconductor ETF with small and mid-cap potential

Finally, for those seeking to diversify away from the top-heavy concentration of large-cap players in the semiconductor industry, XSD is a noteworthy option. XSD follows the S&P Semiconductor Select Industry Index, utilizing a modified equal-weight strategy across its 39 holdings.

What sets XSD apart is its enhanced exposure to small and mid-cap companies within the semiconductor sector. While it may be lagging at the moment, given the current spotlight on larger firms, the future could very well favor these up-and-coming companies. After all, industry giants like Nvidia and AMD were not always the behemoths they are today.

XSD shares the 0.35% expense ratio seen with its peers, ensuring cost-efficiency for investors. Additionally, it boasts great tax efficiency with a low 0.22% 30-day SEC yield. However, it's important to note that the fund is somewhat less liquid, featuring a slightly higher 0.09% bid-ask spread. Despite this, it remains an acceptable choice for buy-and-hold investors looking for broader exposure.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.