Semiconductor chips are amongst the most ubiquitous of items around the globe. Chips are found in every electronic gadget from your phone to your tablets and laptops to televisions and your car or Uber (NYSE:UBER) vehicles. Needless to say, semiconductors are a big market.
But it is a market which has many major and minor companies that start from mining operations for raw materials to foundries for the building blocks of chips to various chips themselves. And it continues to the companies that take the chips to build and sell or use the chips in their products and services. This means semiconductor ETFs are an ideal way to play the sector.
For investors, there are many, many themes and market strategies for the chips market which can be both bearish and bullish for any given time period. This just increases the need for semiconductor ETFs.
Right now, chips are being touted as part of major market developments. It starts with the 5G wireless buildout and rollout. From the data centers to communications networks and all the way through to antennas and devices — 5G is upping demand for all sorts of chips and related semiconductor materials.
Then we have the rapidly developing market for artificial intelligence (AI) and augmented reality (AR) that have great promise for many areas from healthcare to education and manufacturing and even marketing.
And new devices keep coming from all corners of the globe from Apple (NASDAQ:AAPL) –even if they don’t do any of the heavy lifting in engineering their branded products. And the list goes further including my favorite Samsung electronics (which I have in my Niche Investments section of my model portfolios in Profitable Investing.)
And from the gaming to the ever-hyped cryptocurrency mining operations — graphics processing units (GPUs) remain highly in demand bringing another wave of chips in demand as well.
Chips have been on a good run in the stock market. For over the past trailing five years, the industry leaders as tracked by the MVIS U.S. Listed Semiconductor Index have generated a return of 154.69% compared to the S&P 500 Index’s return of 69.43%.
Chips vs Stocks
So, chips are a bigger business than the rest of the broader stock market. This should get your attention and peak your interest in semiconductor ETFs.
But at the moment, trade tensions are weighing on many of the leading companies doing the heavy lifting in semiconductors and chips. U.S.-China tensions and trade restrictions on components and products are causing sales headaches beyond just those two nations. And a major trade problem between South Korea and Japan is directly impacting semiconductor material sourcing.
That said, if you want to cash in on the ongoing market, stay with the U.S.-centric ETF market. This means that there are two semiconductor ETFs to focus upon.
Two U.S. Semiconductor ETFs to Buy
The first is the iShares Semiconductor ETF (NASDAQ:SOXX). It tracks the PHLX Semiconductor Sector Index and does a pretty good job of it with a return over the past five years of 154.06%, compared to the SOX Index return of 160.82%.
Some of the variance comes from the expense ratio of 0.47% which is a bit high in my book for such an index-tracking ETF.
The second ETF is the VanEck Vectors Semiconductor ETF (NYSEARCA:SMH). This ETF tracks the MVIS US Listed Semiconductor Index. Not surprisingly, the SMH ETF closer tracks its index with the five-year return running at 148.10% compared to the underlying index return of 147.38%.
This closer return result is perhaps also due to the underlying cheaper expense ratio of 0.35%.
An Alternative Semiconductor ETF
Instead of focusing solely on semiconductor ETFs — another alternative would be to focus on the broader information technology companies. This would provide exposure to semiconductor-related companies as well as software, services and related hardware — all of which depend on semiconductors in some capacity. This is my approach as I recommend the Vanguard Information Technology ETF (NYSEARCA:VGT).
The return of the Vanguard ETF for the past five years has been 139.61%. And 16.42% of the fund is allocated toward semiconductors. It has a geographic allocation of 96.89% to U.S. companies with minor weightings to Ireland where U.S. companies domicile for tax purposes as well as to Israel.
The Vanguard ETF actually out-returns the underlying MSCI Index over the trailing five years and runs quite lean with an expense ratio of a mere 0.10%.
Now that I’ve presented my way to invest in the semiconductor technology space with ETF’s, perhaps you might like to see more of my market research and recommendations for further safer growth and bigger reliable income. For more, look at my Profitable Investing. Click here to learn more: https://profitableinvesting.investorplace.com/
In addition, if you find yourself in San Francisco on August 15 through 17 – please join me at the MoneyShow where I’ll be presenting my economic and market analysis and my latest investment themes and recommendations. For more information, click here: https://www.moneyshow.com/
Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above