Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the semiconductor industry to thrive as consumers and businesses continue to embrace and demand new electronic goods, the iShares PHLX SOX Semiconductor ETF (Nasdaq: SOXX ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The semiconductor ETF's expense ratio -- its annual fee -- is a relatively low 0.48%. The fund is a bit on the small side, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has actually not performed that well so far, underperforming the S&P 500 over the past three, five, and 10 years. Still, if you think that semiconductor stocks will be surging in the years ahead, it gives you easy access to about 30 of them. Investors with conviction sometimes need to wait for their holdings to deliver.
What's in it?
Several semiconductor companies had strong performances over the past year. Cirrus Logic (Nasdaq: CRUS ) , for example, jumped 68%. With more than 1,000 patents serving more than 700 products, it's a compelling proposition. It doesn't hurt that it's supplying audio chips to Apple, among other customers.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. InterDigital (Nasdaq: IDCC ) , down 40%, also holds a lot of patents, and has some investors frustrated that it's not making the most of them. The stock had risen last year on speculation that it might get bought out, but that didn't happen.
NVIDIA (Nasdaq: NVDA ) , down 35%, is facing a bit of a chip shortage, among other challenges. Its advocates have been calling 2012 the year of the quad-core mobile processor, but Apple's latest iPad didn't embrace quad-core technology as much as some expected, deflating some NVIDIA-related expectations.
Then there's Applied Materials (Nasdaq: AMAT ) , down 21%. It's generating a lot of free cash flow, is buying back many of its shares, has hiked its dividend by 13% (so that it was recently yielding 3%), and recently reported record revenue. The company bought Varian Semiconductor last year, and is poised to benefit as the global economy recovers and the mobile computing revolution continues, requiring lots of chips.
The big picture
Demand for semiconductors isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.