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 is well represented in any broadly based fund that you have in your core portfolio. With cap-weighted funds, you’re going to have the importance of the tech sector represented proportionally. But if you’re a big believer that it’s going to see even more outsized growth and performance and want to bulk up your exposure, you might want to get more granular.

I don’t see anything wrong with making a specific allocation to semiconductors. They’re necessary for any meaningful advanced technology. There will be demand for them. You just have to be prepared for the volatility that comes with the tech sector and particularly a subset of the tech sector. But I think the main threat to the performance of semiconductors is geopolitics.

There’s SMH to consider. It’s got $9.6 billion in assets, the largest in the space, and it’s beating the pants off of XLK. It’s up over 50% while XLK is up around 40%. But it also has larger drawdowns than XLK when it’s down.

One of the things I also really like about it is that it has Taiwan Semiconductor Manufacturing right there in its top holdings. That’s possibly the largest semiconductor company in the world, and some semiconductor funds don’t have it in their portfolio at all, and if they do, its weighting isn’t that big.

Rosenbluth: Good point, Heather. If you own XLK, you don’t own Taiwan Semi, since it is based in Taiwan and not the U.S. like all XLK holdings.

Islam: And for those that don’t know, TSM actually manufactures chips designed by NVIDIA, AMD, Apple, and others.

Semiconductors & Supply Chains

Dave Nadig, financial futurist: I’m going to jump in right where Roxanna landed: The key issue with semiconductors is that the supply chains are so unbelievably fragile, particularly with the current east-west tensions over Taiwan. There’s a lot of talk in the wake of the CHIPS Act (and indeed, TSMC is building a $40 billion fab in Arizona, among other industry efforts to reshore production). However, realistically, Taiwan will make the highest-tech wafers for the foreseeable future.

Investors who have a broad market-cap-weighted portfolio already have exposure to the downsides here. If you own Nvidia or Google or Microsoft or Apple (and don’t we all?), their businesses would be hurt dramatically if TSMC went offline. Doubling down by upping your exposure even more is definitely a risk-on bet on the geopolitical outcomes over the next few years.

Rosenbluth: Dave, you know what ETF owns Taiwan Semiconductor? The Tema American Reshoring ETF (RSHO) — likely for the reshoring you noted above. (Does Todd get the last word?)

Bell: The Engine No. 1 Transform Supply Chain ETF (SUPP), which focuses on the supply chain, also has a weighting in TSM of nearly 6%. But SMH has the most exposure of any ETF to the ADR for Taiwan Semiconductor, based on!

The iShares Taiwan ETF (EWT) has more than one-fifth of its weight in the actual stock.

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