Equity: U.S. Semiconductors
The US semiconductors segment isnt investible in diversified ETF form without modifications. After all, it is dominated by Intel, which makes up around a third of our neutral benchmark. The
“SOXX comes closest (although not that close) to the broad semiconductors market.” three US semiconductors ETFs have chosen unique methods to address the concentration issue and diminish Intel's influence. SOXX comes closest to the broad semiconductors market by using a market-cap-weighted index and capping individual securities at 8%. The other two ETFs dont even try mimicking the industry at large: XSD equally weights its broad portfolio and PSI uses a quantitative model to try to pick outperformers and weight them in tiers. The resulting portfolios arent bad, just different. All three ETFs tilt toward smaller growth companies, since Intel's excess weight must be redistributed somewhere. Expectedly, this tilt is most pronounced in XSD although still prominent in SOXX and PSI. XSD's equal-weighting scheme tilts it far from our neutral benchmark but its selected companies capture the industry at large. SOXX and PSI allocate a large portion of their portfolio to semiconductor equipment & testing companies—a similar, but not right-down-the-middle, industry. While theres no perfect semiconductors fund, XSD is the clear winner when it comes to costs. However, very large or active traders may prefer SOXXs greater liquidity. Still other investors may be intrigued by PSIs quant model despite its higher costs. Overall, XSD gets a nod on our Opportunities List for its mostly pure exposure to the semiconductor space and its low costs, but the right choice really comes down to individual preferences and risk tolerances. (Insight updated 01/16/17)
ETF.com Efficiency Insight
All three US semiconductors funds do a reasonably good job in Efficiency, with XSD and SOXX beating out PSI. They have widely varying expense ratios: XSD is the cheapest, while SOXX and PSI
“All three US semiconductors funds do a reasonably good job in Efficiency.” are more expensive alternatives. PSI may actually be more expensive than it first appears—it has tended to lag its index by significantly more than its expense ratio. Tracking differences follow in the same order as expense ratios with XSD shining, SOXX with moderate results and PSI with sub-par tracking. While none of the funds is exactly a bargain by US equity ETF standards, they are all tax efficient as they have managed to avoid capital gains payouts over their lengthy history. From a closure risk perspective, the clear stalwart in the space is SOXX which, with over $500M in assets, has captured the majority of segment assets. XSDs $200 million in AUM is also sufficient to keep closure risk at bay, but PSI's lesser asset base could elevate closure risk moving forward. (Insight updated 01/16/17)
ETF.com Tradability Insight
SOXX is easily the most liquid ETF in the US semiconductor segment, with over $20 million changing hands on most days. Of the remaining two US semiconductor ETFs, XSD takes the cake with a
“SOXX is currently the most liquid ETF in the US semiconductor segment.” median trading volume north of $3 million while PSI comes in a bit shorter than the others with more than $700K. Investors will need to be very careful executing trades in PSI with its low volume and wide spreads. Expectedly, the most heavily traded funds in the segment also sport the tightest spreads: SOXX's and XSD's average spreads are a step above that of PSI's. Wide spreads increase trading costs, which can eat into returns.
Investors looking to trade in size, however, may do well in any of the three funds as all earn perfect block liquidity scores: Talk to a liquidity provider to trade blocks of a few thousand shares or more.
Limit orders are a good way for retail investors to control trading costs (Insight updated 01/16/17)
ETF.com Fit Insight
None of the funds in the US semiconductors segment fits the industry particularly well—a function of its highly concentrated domination by Intel (roughly a third of our neutral
“SOXX includes US-listed foreign companies, like Taiwan Semiconductor” benchmark) that traditional diversified ETFs cant replicate. Still, none of the ETFs in the segment handles the redistribution of Intel's weight perfectly. SOXX attempts to create a more diversified portfolio by capping individual security weights in its otherwise-market-cap-weighted index at 8%—a sensible rule. However, it expands its selection universe beyond pure-play semiconductor companies to include securities from related industries like semiconductor equipment & testing and computer hardware. It also includes US-listed foreign companies, like Taiwan Semiconductor—one of its top holdings. This creates a broad portfolio with a bit of international flair, which may be fine if investors want to cast a wide net. XSD has the opposite problem - its selection universe is largely US semiconductor companies, but its equal-weighting scheme ends up tilting XSD even further from our neutral benchmark. Meanwhile, PSI uses a quant model that attempts to pick winners— its loose selection criteria gives the fund more exposure to semiconductor equipment & testing companies. It also uses a tiered equal-weighting scheme, tilting its portfolio even further away from mega-cap domination. All three funds tilt toward smaller growth companies. The uncapped neutral benchmark has a weighted average market cap of $60+ billion, while SOXX ($45 billion), PSI ($20 billion) and XSD ($13 billion) all tilt significantly smaller. XSD is tilted the furthest toward small-cap growth companies, in part because it holds more securities than its competitors, and every additional security in an equal-weighted basket pulls more weight away from the biggest ones. (Insight updated 01/16/17)