Definitive Guide To Semiconductor ETFs: Semiconductor ETFs 101

by on November 19, 2009 | Updated April 29, 2013

For investors looking to make a play on the technology sector through ETFs, there are a number of options offering varying degrees of exposure. The PowerShares QQQ Trust (QQQQ) tracks the Nasdaq 100 Index, meaning it is tilted heavily towards the technology sector (about 65% of its holdings), but maintains moderate exposure to health care and consumer discretionary companies as well. For investors looking to make a pure play on technology, there are several broad-based technology funds, such as XLK and IYW, that invest in various technology-related companies. But there are also technology ETFs offering far more specialization, including funds focusing on software (IGV and PSJ), internet architecture (IAH), nanotechnology (PXN), and several other.

Semiconductor ETFs Are Similar, But DifferentOne of the most popular corners of the technology sector focuses on semiconductors, a key component of almost every modern electronics product. Named because their electrical conductivity is between that of a conductor and an insulator, semiconductors are useful as sensors in countless gadgets. About 40% of demand for semiconductors is linked either directly or indirectly to computer sales, creating a strong relationship between PC demand and the health of the semiconductor industry. Cell phones also account for a significant portion of demand, and the introduction of new versions of smartphones has helped to prop up the semiconductor market.

Semiconductor Outlook And Industry

The major players in the semiconductor space include giants Intel and Texas Instruments. But the industry is far from an oligopoly. There are dozens of publicly-traded companies that maintain a material market share, including AMD, National Semiconductor, and others. As such, price competition can be particularly fierce at times.

According to research firm Gartner, global semiconductor sales are expected to total about $225 billion in 2009, representing a decline of about 11% from 2008 results. Gartner expects 2010 revenue to bounce back to 2008 levels of about $255 billion. BofA Merrill Lynch recently slashed its projection for 2010 growth from 21% to 18%, downgrading several major chipmakers in the process. “While we believe the correction will likely prove short and shallow, we think any hint of a correction in the supply chain could punish (semiconductor) stocks,” BofA Merrill wrote in a note to clients.

Semiconductor ETFs

Holdings 18 46 27 30
Intel & TI % 44.5% 17.9% 8.3% 10.3%
Expense Ratio n/a 0.48% 0.35% 0.60%
YTD Return 43.1% 52.5% 68.5% 27.6%
Holding and allocations as of November 18.

It may sound like a niche market, but semiconductors are big business. There are four ETFs focusing exclusively on semiconductor companies, including funds from PowerShares, iShares, State Street, and Merrill Lynch. While there are many similarities between these four ETFs (including significant overlap in holdings), there are some rather big differences as well. The iShares ETF offers the most depth in terms of number of holdings, but has a significantly bigger allocation in Texas Instruments and Intel than XSD and PSI (although far less so than the Semiconductor HOLDRS). For investors looking to make an investment in semiconductors, each of these funds has something slightly different to offer.

  • HOLRDS Merrill Lynch Semiconductor (SMH): The largest semiconductor ETF, SMH has more than $725 million in assets. Like most other HOLDRS products, SMH concentrates a large portion of its portfolio in a few companies: about 23% of the fund is allocated to Intel and 22% to Texas Instruments.


  • iShares North American Technology-Semiconductors Index Fund (IGW): This ETF tracks the S&P North American Technology-Semiconductors Index, a benchmark that measures the performance of producers of capital equipment and manufacturers of wafers or chips. IGW’s current price-to-earnings ratio of more than 37 reflects the strong rebound anticipated for component companies in 2010.


  • SPDR S&P Semiconductor ETF (XSD): The cheapest of the four ETFs highlighted here, XSD has also delivered by far the best year-to-date returns. XSD is based on an equal-weighted index, accounting for the relatively small allocation to Intel and Texas Instruments relative to the other ETFs profiled herein.


  • PowerShares Dynamic Semiconductor Portfolio (PSI): This ETF is based on an “Intellidex” that seeks to identify companies in the semiconductor industry poised to outperform the broad market (learn more about “intelligent” or “enhanced” indexes here).


Disclosure: No positions at time of writing.