Major players in the tech industry, including Microsoft, Amazon, Alphabet, Meta Platforms, and Oracle, are set to invest nearly $700 billion in capital expenditures by 2026, representing an astounding 81% increase from the previous year. A significant portion of this investment aims to address the growing demand for semiconductors, a critical component in the expansion of technology infrastructure and artificial intelligence applications.
In light of this surge in investments, the semiconductor sector has gained attention from investors, particularly through exchange-traded funds (ETFs). Three main ETFs dominate the market: the VanEck Semiconductor ETF (SMH), the iShares Semiconductor ETF (SOXX), and the Invesco PHLX Semiconductor ETF (SOXQ). Each fund tracks different indexes and varies in composition and cost, appealing to different investment strategies.
The VanEck Semiconductor ETF (SMH) focuses on a concentrated portfolio of 25 stocks from the MVIS US Listed Semiconductor 25 Index and employs a market capitalization-weighted strategy. This structure leads to a heavier emphasis on larger companies. Notable holdings in the SMH include Nvidia (15.55%), Taiwan Semiconductor Manufacturing (9.78%), and Micron Technology (7.28%), reflecting a strong bias toward major players in the industry.
Conversely, the iShares Semiconductor ETF (SOXX) encompasses around 30 stocks and tracks the ICE Semiconductor Index. It also uses a cap-weighted methodology but imposes limits on individual stock holdings, resulting in a slightly more diversified portfolio leaning toward smaller companies. Major holdings here include Micron (11.04%), AMD (9.51%), and Broadcom (6.58%).
The Invesco PHLX Semiconductor ETF (SOXQ), also tracking around 30 stocks, distinguishes itself with a significantly lower expense ratio of 0.19%, nearly half that of the SOXX ETF. Key positions in SOXQ include Micron (11.26%), Nvidia (9.12%), and Broadcom (8.39%).
When comparing these ETFs, the VanEck Semiconductor ETF stands out with a remarkable average annual return of 36% over the past five years, outperforming the iShares Semiconductor ETF, which averages 31%. The concentration of mega-cap companies like Nvidia and Taiwan Semiconductor Manufacturing—expected to be significant capital expenditure spenders—fuels this performance.
In contrast, while the iShares ETF offers a more balanced portfolio, its expense ratio of 0.34% can detract from overall returns. This raises questions about its long-term viability compared to the lower-cost Invesco ETF, which has shown a trend of modest outperformance due to its reduced expenses.
While the three ETFs may perform similarly depending on market conditions, particularly whether larger companies lead the market, the cost differential plays a crucial role. The Invesco PHLX Semiconductor ETF is favored for its cost-effectiveness and diversified approach, making it an attractive option for investors looking to capitalize on upcoming growth in the semiconductor market.
As these companies ramp up capital expenditures and anticipate revenue growth in the coming years, the ETF offerings that focus on semiconductors could emerge as solid choices for investors seeking exposure in this evolving sector. It’s recommended for investors to treat such funds as satellite holdings rather than core positions, ensuring they maintain cautious sizing in their portfolios.
