Posted on 03 August 2011.
When it comes to investing in the semiconductor sector, the discussion is often dominated by Intel (Nadaq: INTC) and if ETF investors aren’t careful, they may find their semiconductor ETF has unwanted excessive exposure to the world’s largest semiconductor maker. That’s not to say Intel is a bad stock. It’s a member of the Dow Jones Industrial Average, one of the most important members of the Nasdaq 100 and will always be bellwether chip name.
All those compelling factoids aside, investors opting to tap into semiconductor ETFs are usually doing so because want exposure to the fast-paced world of technology without the burden of stock-picking or excessive exposure to just one or two stocks. In that vein, it is crucial investors study the holdings of semiconductor ETFs before jumping in.
The excessive weight theme when it comes to semiconductor ETFs is on full display with one of the sector’s most heavily traded funds: the Semiconductor HOLDRs (AMEX: SMH). Texas Instruments (NYSE: TXN), Intel and Applied Materials (Nasdaq: AMAT) combine for over 50% of this ETF’s weight meaning it is anything but diverse.
For a more diverse approach among semiconductor ETFs, check out the SPDR S&P Semiconductor ETF (NYSE: XSD). XSD is home to about 50 stocks, none with weightings of more than 2.58%. Yes, Intel is a top-10 holding in XSD, but it doesn’t have the impact on the ETF’s performance the way it does with SMH. XSD’s diversity also means investors capture exposure to chipmakers that make chips for products beyond just personal computers, one of the slower growing areas of the semiconductor universe.
XSD has $93.1 million in assets under management and an expense ratio of 0.35%. Another semiconductor ETF option to consider is the iShares PHLX SOX Semiconductor Index Fund (Nasdaq: SOXX). SOXX is home to 31 stocks and while Intel is the ETF’s top holding with a weight of 9.1%, names such as Broadcomm (Nasdaq: BRCM), Texas Instruments and Applied Materials all figure prominently in SOXX’s mix.
SOXX has a higher expense ratio than XSD at 0.48%, but has over $165 million in assets under management and has outperformed XSD by a small margin over the past six months.
If it’s rapid short-term gains you crave, try the ProShares Ultra Semiconductors (NYSE: USD) for double-leveraged exposure or the Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL). For bearish semiconductor ETFs, give the Direxion Daily Semiconductor Bear 3X Shares (NYSE: SOXS) and the ProShares UltraShort Semiconductors (NYSE: SSG) a look.
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