SOXX ETF: Semiconductor play with decent diversification

There’s been a lot of focus on semiconductors as the AI ​​craze has slipped investors’ minds over the past year and a half. Nvidia ( NVDA ) has obvious been the biggest beneficiary here, but there are many others companies in the industry worth considering and exposure to. If you’re still bullish on the semis despite the huge advance that’s already taken place, then you might want to consider the iShares Semiconductor ETF (NASDAQ:SOXX). This fund allows you to invest in the semiconductor industry, which forms the basis of modern technology and looks set to grow a lot over the next few years. Compared to the NYSE Semiconductor Index, SOXX has become a core fund for access to all things semiconductor design, manufacturing and distribution.

The question is whether it makes sense to buy this fund, or just instead, you get direct access to the largest semiconductor stocks.

A look at holdings

As one might expect when dealing with an industry-specific fund like this, there is quite a bit of concentration at the top. Broadcom and Nvidia make up the largest position sizes, accounting for nearly 20% of the total portfolio. Not a surprise given how big these companies are, but still a risk.

These holdings show how SOXX focuses on companies that lead their fields and play key roles in the broader semiconductor world. These holdings also clearly explain the momentum seen in the group. The problem with this? The timing, when it turns, can get ugly, and any kind of letdown or slowdown in semiconductor demand from the AI ​​side of things could significantly hurt SOXX’s performance potential. With just 30 names and a P/E of 33x, it’s clear that there’s a lot more risk here than people can tell just by looking at a chart. And a beta of 1.59 can work great in a bull market, but it sure hurts when it’s in a bear market.

Sector weights and global allocation

SOXX is putting all its eggs in one sector basket in the Tech sector, clearly. However, semiconductor companies make up 77% of the fund, and equipment manufacturers make up the rest. While SOXX invests in US companies, it also includes global giants such as Taiwan Semiconductor and ASML, which are vital to the semiconductor supply chain.

Peer comparison

A popular fund worth comparing to SOXX is the VanEck Semiconductor ETF (SMH). SMH actually had fewer holdings (26 positions) and a very high concentration at the top of the portfolio as well. The biggest difference is in the structure though, with SMH having Nvidia as the biggest allocation at 21% of the fund, followed by Taiwan Semi coming in 2nd.^when to 14%. When we look at the price ratio of SOXX to SMH, we find that SOXX has dramatically underperformed. Clearly, this is due to the relative weights at the top, especially when it comes to Nvidia. I will say that I suspect the ratio has gone down here, so I’d probably personally prefer SOXX over SMH if weighing between the two.

Pros and cons

Additionally, the fund’s exposure to the chip industry puts it in a good position to benefit from long-term growth tailwinds. New technology and more need for chip parts are driving these trends. And while they are concentrated, there is a good mix of stocks here that cover the entire semiconductor value chain. The momentum is there, and the semi-final love affair so far doesn’t seem to be slowing down in terms of narrative.

But there are risks to think about. The chip industry goes up and down a lot, and companies in this field see big changes in demand and prices. Also, fights between countries and supply issues can affect how chip companies make chips, which can change the risk dynamic with the fund. And let’s face it – this isn’t a new story, and it’s certainly not fundamentally cheap. This would be a great source of selling pressure for whenever stocks finally have a sustained correction.

Conclusion

In conclusion, the iShares Semiconductor ETF offers investors a way to quickly invest in the growth of the semiconductor industry. Some might prefer to pick individual stocks like Nvidia, but there’s merit in doing so given the broad exposure offered here. SOXX has a good mix of holdings and focuses on top companies in the industry, without as much concentration as what you see in SMH. This puts it in a good place to deliver strong returns in the coming years. While investing in semiconductors has its risks, the potential gains make this fund worth considering for forward-looking investors.

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