That index weighting criteria has led to meaningful outperformance of XSD versus the competition over the last year. The fund has gained +47.42% compared to +27.78% in SOXX during that time frame. XSD is also one of the lowest cost funds in this category with a net expense ratio of 0.35%.
There are also two smart beta funds in this category that select and weight their holdings according to strict factor criteria. The PowerShares Dynamic Semiconductors Portfolio (PSI) and First Trust Nasdaq Semiconductor ETF (FTXL) use fundamental screening characteristics to build their portfolios. PSI evaluates semiconductor companies based on price momentum, earnings growth, quality, and value scores. The end result is a basket of 30 stocks with an emphasis on smaller and mid-sized market capitalizations.
FTXL takes a similar tact by weighting stocks based on trailing 12-month trailing volatility, value metrics, and recent price appreciation criteria. The companies showing the highest scores in these factors are given the largest share of capital within the fund. Currently that distinction belongs to Micron Technology Inc (MU) and ON Semiconductor Corp (ON), which account for nearly 20% of the asset allocation.
It’s worth noting that many smart beta ETFs like PSI and FTXL are regularly evaluating and rebalancing their holdings on a quarterly basis. As such, the portfolio can shift over time more so than a traditional passive index.
The Bottom Line
Semiconductor ETFs may be appropriate for those investors who are seeking the companies demonstrating strong relative returns to the market and have recently broken out to new highs. These funds may be used to supplement traditional sector or broad market exposure to overweight a portfolio towards technology hardware manufacturers.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.