(MENAFN- ValueWalk) The semiconductor industry has been one of the top performers on the market this year. In fact, semiconductor stocks are up by an average of 96% this year, and over the last 10 years as of Dec. 20, the industry has posted an average total return of 691%.
Semiconductors are vital in this digital age. They control and manage the flow of electric current in all types of electronics and technology, serving as a switch, conducting electricity, and providing power to smartphones, computers, gaming consoles, appliances, medical equipment, and pretty much any other device you can think of.
As we move deeper into the digital age with new applications like artificial intelligence (AI) emerging all the time, the utility of semiconductors should only increase. A good way to invest in this high-performing industry without trying to pick the winners yourself is through an exchange-traded fund (ETF) focused solely on semiconductors. Here are three great options.
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1. VanEck Semiconductor ETF
2. iShares Semiconductor ETF
3. SPDR S&P Semiconductor ETF
Remember to diversify 1. VanEck Semiconductor ETF
The VanEck Semiconductor ETF (NASDAQ:SMH) is one of the most popular and best-performing semiconductor ETFs you can invest in. It is highly concentrated, tracking the MVIS U.S.-Listed Semiconductor 25 Index, which means it only has about 25 holdings. The fund includes mostly large-cap names as it seeks to track the most liquid companies in the industry based on market capitalization and trading volume.
The top three holdings are NVIDIA (NASDAQ:NVDA), which accounts for 19.2% of the portfolio, followed by Taiwan Semiconductor (NYSE:TSM), which has a 12.8% weight. The third-largest position is Broadcom (NASDAQ:AVGO), which makes up 6.6% of the ETF.
The VanEck Semiconductor ETF is up 71% year to date and 68% over the past 12 months. Over the last 10 years, it has produced a 24.5% average annual return, and since its inception in 2011, it has generated an average annualized return of 23.5%. The ETF has an expense ratio of 0.35%.
2. iShares Semiconductor ETF
The iShares Semiconductor ETF (NASDAQ:SOXX) is one of the oldest ETFs of its kind, debuting in 2001. It follows the ICE Semiconductor Index, which tracks the performance of the 30 largest semiconductor companies.
The iShares ETF includes companies that either manufacture materials that have semiconductors, utilize LED and OLED technology, or provide services or equipment associated with semiconductors, like packaging and testing. It utilizes a modified market-cap-weighting methodology, which is essentially a hybrid of equal weighting and weighting by market cap. As a result, its positions are a bit less heavy on the top end than the VanEck fund.
The top three holdings in this ETF are Broadcom at 8.8% of the portfolio, Advanced Micro Devices (NASDAQ:AMD) at 8.3%, and NVIDIA at 7.6%. It is slightly broader and less top-heavy than the first selection, but it is still highly concentrated.
The returns are also fairly similar, as the iShares Semiconductor ETF is up 65% YTD and 61% over the past year. Over the last 10 years, it has posted an average annualized return of 23.2%, and since its inception in 2001, it has an average return of 10.2%. The iShares Semiconductor ETF has an expense ratio of 0.35%.
3. SPDR S&P Semiconductor ETF Whereas the first two options are pretty similar, the SPDR S&P Semiconductor ETF (NYMARKET:XSD) is a little different. It is quite a bit broader than the others as it tracks the S&P Semiconductor Select Industry Index, which includes all semiconductor stocks within the S&P Total Market Index.
That means it contains large-, mid-, and small-cap semiconductor stocks, holding about 40 stocks in all. The SPDR ETF is also different in that it's weighted using a modified equal-weighted methodology, which provides a little more diversification than the other two.
Thus, the top three holdings are different, except for Broadcom , which is the largest holding at 3.1%. The next largest are First Solar (NASDAQ:FSLR) at 3%, followed by Lattice Semiconductor (NASDAQ:LSCC) and Allegro MicroSystems (NASDAQ:ALGM), both at 2.9%.
Year to date, the SPDR S&P Semiconductor ETF is up by about 34.8%, and it has a one-year return of 32.5%. Over the past 10 years, it has generated an average annualized return of 21.9%, and since its inception in January 2006, it has posted a 12.6% annualized return. The fund has the same expense ratio as the other two, at 0.35%.
Remember to diversify
Keep in mind that these are highly concentrated, industry-specific funds, so they will be more volatile, and the underlying stocks will mostly move in tandem. While these funds have aggressive growth potential, as the numbers this year have illustrated, volatility goes both ways, so they are prone to big swings the other way too.
However, over the long term, they have produced market-beating returns. Any of these three ETFs certainly could play an important role in a long-term investment strategy but should not account for more than a relatively small portion of a diversified portfolio.
Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.
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