New Bill Could Boost Semiconductor ETFs

July 25, 2022

Lawmakers are set to hold a final vote this week on a bill that is designed to encourage semiconductor manufacturing, and could have a significant impact on the performance of semiconductor exchange-traded funds in the U.S.  

The Creating Helpful Incentives for Producing Semiconductors for America Act would provide roughly $50 billion in subsidies to support semiconductor manufacturing. Senator John Cornyn, R-Tex., is the lead author of the bill, and said last week that no advanced semiconductors are currently manufactured in the U.S.  

If American companies cannot acquire those advanced semiconductors, gross domestic product would fall by 3.2%, and the resulting loss could be three times worse than the effects of the current chip shortage, which saw $240 billion in GDP lost last year, he added.  

According to the Semiconductor Industry Association, the U.S.’ portion of global semiconductor manufacturing capacity is now just 12%, having eroded over a 30-year period from 37%. 

US-Listed ETFs 

There are currently six semiconductor ETFs trading on U.S. markets, although all except one cover U.S.-listed securities. Only three have more than $1 billion in assets under management, the largest of these being the $7.07 billion VanEck Semiconductor ETF (SMH), which also happens to be the only global fund.  

 

Ticker Fund Segment Inception Exp Ratio AUM
SMH VanEck Semiconductor ETF Equity: Global Semiconductors 5/5/2000 0.35% $7.07B
SOXX iShares Semiconductor ETF Equity: U.S. Semiconductors 7/10/2001 0.43% $7.04B
XSD SPDR S&P Semiconductor ETF Equity: U.S. Semiconductors 1/31/2006 0.35% $1.07B
PSI Invesco Dynamic Semiconductors ETF Equity: U.S. Semiconductors 6/23/2005 0.56% $578.44M
FTXL First Trust Nasdaq Semiconductor ETF Equity: U.S. Semiconductors 9/20/2016 0.60% $82.87M
SOXQ Invesco PHLX Semiconductor ETF Equity: U.S. Semiconductors 6/11/2021 0.19% $58.32M

 

Interestingly, despite having a broader scope as a global fund, SMH is also the most concentrated portfolio, with just 25 companies represented. All the other funds in the category include 30 to 40 securities. In fact, 23 of SMH’s holdings are also in the portfolio of the slightly smaller $7.04 billion iShares Semiconductor ETF (SOXX)

SOXX was the largest fund in the space for many years, and at the end of 2021, had nearly $10 billion in assets. However, starting in 2022, SMH pulled ahead, and is now the only fund in the category that has seen strong positive inflows during 2022, gaining $2.5 billion in assets year to date through July 21.  

 

  Flows
Ticker 1-Mo 3-Mo YTD 1-Yr 3-Yr
SMH -$33.38M -$1,015.41M $2,451.61M $2,722.64M $4,855.09M
SOXX -$69.01M -$371.90M -$95.89M $1,371.62M $3,825.19M
XSD -$2.56M -$52.78M -$76.39M $263.98M $494.41M
PSI -$10.03M -$18.39M -$88.80M $49.30M $263.38M
FTXL -$2.67M -$5.99M -$1.64M $17.85M $38.27M
SOXQ $1.24M -$1.84M $26.90M $0.46M $17.71M

 

The only other fund in the category to have a positive year-to-date inflow in 2022 is the Invesco PHLX Semiconductor ETF (SOXQ), which tracks SOXX’s original index (which SOXX abandoned in June 2021). SMH has the best return within the category, with a loss of nearly 25%, but all the other funds are down 26-28% during 2022.  

Even though there are a lot of similarities among the portfolios, the global nature of SMH and its heavy weighting to large cap stocks (more than 98% of the portfolio and more than the other semiconductor ETFs) may have given it an edge in the eyes of investors.  

Given that a global recession is a very real possibility, a global large cap portfolio may hold a lot of appeal for an industry that is one of the key drivers of the modern economy. After all, small caps tend to get hit harder going into a recession than larger capitalization stocks.  

A Smaller Cap Alternative? 

Small cap stocks tend to do better once a recession is ending, bouncing back more quickly than large caps. Tactical investors may want to switch their allocation to the $1.07 billion SPDR S&P Semiconductor ETF (XSD) once they believe the economic situation is looking up. XSD, unlike SMH and SOXX, has an allocation to large caps of less than 37% and significant exposure to the low size factor of 1.34. SMH and SOXX both have negative exposures to the low size factor.  

Its underlying index is equal-weighted, another contributing factor in tilting it away from large caps.  

XSD also outperforms SMH and SOXX over the one-year period, during which it notched the best return in the category with a decline of just 5.39%. It also outperforms SMH and SOXX during the three- and one-month periods.  

 

  Returns
Ticker 1-Mo 3-Mo YTD 1-Yr 3-Yr 5 Yr 10-Yrs
SMH 9.71% -3.42% -24.86% -9.23% 26.90% 23.02% 24.07%
SOXX 10.27% -4.44% -25.88% -9.35% 25.76% 23.05% 24.78%
XSD 11.16% -1.52% -27.90% -5.39% 25.62% 22.22% 24.40%
PSI 11.40% -1.10% -27.17% -9.95% 26.00% 19.98% 23.79%
FTXL 11.06% -4.23% -25.84% -9.35% 22.03% 18.68% --
SOXQ 10.11% -4.33% -26.16% -5.67% -- -- --

 

Further, XSD has the broadest portfolio in the category, with 40 securities.  

 

Top 10 Holdings
SMH   SOXX   XSD  
Taiwan Semiconductor Manufacturing Co., Ltd. Sponsored ADR 10.73% NVIDIA Corporation 8.04% Impinj, Inc. 3.59%
NVIDIA Corporation 8.94% Intel Corporation 8.00% Lattice Semiconductor Corporation 3.10%
Qualcomm Incorporated 5.72% Broadcom Inc. 7.75% Qualcomm Incorporated 2.96%
Texas Instruments Incorporated 5.24% Texas Instruments Incorporated 6.43% Wolfspeed Inc 2.92%
Intel Corporation 5.15% Advanced Micro Devices, Inc. 5.82% First Solar, Inc. 2.79%
ASML Holding NV ADR 4.75% Qualcomm Incorporated 4.55% Skyworks Solutions, Inc. 2.77%
Broadcom Inc. 4.74% Analog Devices, Inc. 4.24% NVIDIA Corporation 2.72%
Analog Devices, Inc. 4.66% KLA Corporation 4.18% Texas Instruments Incorporated 2.72%
Advanced Micro Devices, Inc. 4.60% NXP Semiconductors NV 3.97% Monolithic Power Systems, Inc. 2.71%
KLA Corporation 4.51% Microchip Technology Incorporated 3.92% Qorvo, Inc. 2.71%

 

SMH is clearly an investor favorite right now relative to the other ETFs given its flows. However, the historical returns for the funds show that they are very similar in terms of performance.  

XSD is a perfectly acceptable fund, though slightly less liquid than SMH or SOXX, and its small cap exposure could appeal to certain investors, such as tactical traders or those looking to exploit the growth opportunities in a mature industry.  

 

Contact Heather Bell at [email protected] 

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