Probing the Plumbing of a Popular Semiconductor ETF | ETF Trends

Technology is one of the best-performing sectors this year and while semiconductor stocks and ETFs aren’t setting the world on fire, the group is outperforming the broad market. Just look at the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX).

SOXX seeks to track the investment results of the PHLX Semiconductor Sector Index composed of U.S. equities in the semiconductor sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The underlying index measures the performance of U.S.-traded securities of companies engaged in the semiconductor business.

“The PHLX Semiconductor Index (SOX) was launched on December 1, 1993, and has enjoyed a storied history, becoming one of the best-known and most widely-tracked subsector indexes. During the 2010s, SOX returned 513% on a total return basis, besting even the Nasdaq-100 Index which soared 426%,” writes Nasdaq product development specialist Mark Mandex.

Sizing Up SOXX

As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters.

“Of the 30 constituents in SOX, the top 15 represented 80% of the index weight as of the end of 1Q’20,” according to Mandex. “The top 10 names represented approximately 63%, while the top 5 represented 42%. The largest of these was NVIDIA Corporation (NVDA), whose outsized weighting was a function of its 12% positive return YTD. Every other constituent’s YTD return was negative, with an average loss of almost 22%.”

Over the past decade, semiconductor companies have grown more efficient, reducing costs and increasing production. Chipmakers learned to streamline production and improve their capacity planning and equipment spending. Meanwhile, chip demand surged as the global economy expands.

Data confirm that some SOXX components have been on impressive runs of growth over the past several years.

“For the same group of companies, the average market cap was $33.7Bn on March 31, 2017, with a median of $14.7Bn,” according to Mandex. “Thus on average, market caps grew by 38%, while the median increased by 22%, over this three-year period. NVDA’s increased by 151%, second only to Advanced Micro Device (AMD)’s 289% increase.”

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.