Highly Cyclical Semiconductor Industry Soaring

July 16, 2014

Earnings add performance fuel to related ETFs.

Semiconductor ETFs 1 Year

Chart courtesy of StockCharts.com

Earlier this week we noted that semiconductors are America's hottest industry so far in 2014. Now, earnings results are turning that dial even higher. On Tuesday, Intel—by far the biggest semiconductor company—announced earnings that blew the socks off expectations and sent the stock ripping.

With all eyes focused on semiconductors, it's time for a breakdown of the ETFs offering exposure to this concentrated, highly cyclical industry:

The iShares PHLX Semiconductor ETF (SOXX | A-70) tracks a modified market-cap-weighted index of U.S.-listed semiconductor companies. It caps single-company exposure at 8 percent—greatly reducing the influence of giants like Intel, which represents roughly 35 percent of the semiconductor market alone. The cap also tilts the portfolio toward smaller, growth-oriented companies as seen in the ETF's weighted average market cap ($44 billion) and P/E (25). SOXX is the most popular fund in the segment, and its superior liquidity, combined with its comprehensive portfolio, earns it our Analyst Pick designation.

The SPDR S&P Semiconductor ETF (XSD | A-46) tracks an equal-weighted index of semiconductor companies. XSD's equal-weighting scheme goes even further than SOXX's capping-scheme in reducing the influence of the largest companies on its portfolio. Compared with SOXX, XSD tilts much smaller ($10 billion weighted average market cap) with more growth (50 P/E).

Lastly, the PowerShares Dynamic Semiconductors ETF (PSI | C-57) uses a quantitative model to select and weight companies in a bid for outperformance. Like SOXX, PSI holds a concentrated portfolio of only 30 companies in the admittedly small and concentrated semiconductor industry. In selecting and weighting its portfolio, PSI considers risk factors, style classification and valuation factors. This methodology hasn't produced risk-adjusted outperformance, but it did beat the other funds in the segment over the past year.

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