Semiconductor ETF Face-Off

Semiconductors are what make the modern world go round. If it’s powered by a computer, there’s a semiconductor involved. And there’s a lot in our lives that depends on computers, from your cellphone to your car.

And right now there’s a shortage of semiconductor chips that could last into next year, because between the pandemic and the rise of 5G, producers cannot keep up with demand.

If you want to play the space, there are 10 ETFs focused on semiconductors. The largest two are very similar and therefore a bit hard to choose between.

The $7.2 billion iShares Semiconductor ETF (SOXX) tracks the ICE Semiconductor Sector Index as of June 1, while the $5.9 billion VanEck Semiconductor ETF (SMH) tracks the MVIS U.S. Listed Semiconductor 25 Index. The two ETFs are also in a similar range in terms of pricing, with SOXX charging 0.43% in expense ratio and SMH charging 0.35%—a difference of 8 basis points.

Chart courtesy of FactSet

Interestingly, despite its somewhat smaller size, SMH is the more liquid fund, with a bid/ask spread of 0.01% versus SOXX’s 0.02%, and nearly $800 million in daily dollar volume versus $332 million for SOXX.

Chart courtesy of FactSet

Portfolio & Holdings

The portfolios, again, are very similar, but with some standout differences. The two funds share seven components in just their top 10 holdings, with SOXX’s largest allocation being to Intel at 8.2% and SMH’s being to Taiwan Semiconductor Manufacturing at a whopping 15.53%.

In other words, SMH’s largest holding has a weighting that is nearly twice that of the largest holding in SOXX—something to keep in mind if you have concerns about concentration risk.

Digging deeper into the complete list of holdings for each company, the two funds have 24 companies in common. It should be noted that SOXX also offers exposure to Taiwan Semiconductor Manufacturing, but the company has a weighting of just 3.54% in the fund.

Similarly, while Nvidia is the second-largest holding in SMH, with a weight of 11.23%, it has a weighting of just 7.59% in SOXX. Most of the other companies held in common have relatively similar weightings by comparison.

Further, once you look past the two largest industry groups in each fund (semiconductors and semiconductor equipment and testing), the categories sharply divide. Industrial machinery and equipment constitutes 0.71% of SOXX’s portfolio, while electronic equipment and parts has a weight of just 0.20%. Contrast that with SMH, which covers just three industry groups in all, with the third—software—weighted at 2.73%.  

In terms of factor exposures, they are mostly similar, with the most notable difference related to the low size factor. SOXX is underweight in exposure to the factor at -0.22, while SMH exposure stands at -0.46. And while SOXX has an exposure to the yield factor of -0.13, SMH’s exposure is at -0.24.

ESG & Performance

SMH has better MSCI ESG ratings on every metric except for weighted average carbon intensity, which is the tons of carbon produced relative to each million dollars in sales. SMH scored 87.77, while SOXX scored 74.02. In all other areas, the scores are fairly close.

Performance is another area where the two funds are basically neck-and-neck. Over the one-month period ended Sept. 30, SOXX returned -5.07%, while SMH returned -5.69%. Year-to-date, the gap was at 18.28% versus 17.46%, with their five-year annualized returns at 33.54% versus 31.95%.

Chart courtesy of FactSet

Both seem to be viewed similarly by investors too. SOXX pulled in $1.4 billion in assets as of the end of the third quarter, with SMH right on its heels with a gain of $1.3 billion.

Conclusions

The main aspect to consider when deciding between these two funds seems to be the concentration risk. The top two components in SMH represent more than a quarter of the total portfolio.

SOXX not only has more components, but they have much less skewed weightings. Its top two holdings, for example, make up 16.3% of the fund. Moreover, SOXX’s top 10 holdings have a combined weight of less than 56% in its portfolio versus 67.56% for SMH’s top stocks.

Despite its slightly lower liquidity, SOXX’s somewhat more diversified portfolio is likely driving its current outperformance edge above SMH.

Contact Heather Ball at  [email protected]