The semiconductor industry is a critically important one and worth the consideration of every long-term stock investor. That said, if you conclude that you want to invest in semiconductor companies but don't know which ones to buy, consider plunking your money in a good exchange-traded fund (ETF) that's focused on semiconductor companies -- such as the SPDR S&P Semiconductor ETF (XSD +1.57%).
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Key Data Points
What's an ETF?
First, let's define a term or two. If you're not familiar with ETFs, know that they are essentially mutual-fund-like investments that trade like stocks -- meaning you can buy or sell as little as a single share at any time during the trading day. An ETF's value will fluctuate throughout a trading day, as well, just like a stock's value will, while mutual fund values are only calculated once a day.
Each ETF contains a range of securities, as does a mutual fund. Many are broad-market index funds, tracking, for example, the S&P 500 index. Many others have narrower focuses, such as a particular region in the world, companies of a certain size, or companies within a certain industry -- such as semiconductors.
Why invest in semiconductors?
Semiconductors are a growth industry. They're in many, many things you use, both expected and unexpected things -- such as your smartphone, tablet, laptop, gaming console, car, camera, and very possibly even your refrigerator, washing machine, microwave oven, and light bulbs. As you can imagine, there will be many more chips in many more things as the years go by, ensuring long-term growth.
Indeed, the folks at Fortune Business Insights have forecasted that "the global semiconductor market is projected to grow from $573.44 billion in 2022 to $1,380.79 billion by 2029, at a [compound annual growth rate] of 12.2%."
Here are some (of many) things to know about the semiconductor industry:
- It changes quickly, as newer and better chips debut often.
- It's cyclical, with its stocks rising and falling along with boom and bust phases.
- There are a wide range of chips, including memory chips, microprocessor chips that power personal computers and smartphones, graphic processing units demanded by video games, and many more.
- The industry encompasses companies that design chips, ones that manufacture chips, and ones that supply the manufacturers.
- The U.S. government is investing billions of dollars in the industry, in order to bolster chip manufacturing here on our home turf.
Why this semiconductor ETF?
Since it's not a simple matter to understand semiconductor technology deeply, enough to be able to evaluate which companies in the industry are most likely to thrive, it can make sense to invest in a wide range of them -- via an ETF. So consider the SPDR S&P Semiconductor ETF.
The ETF's performance is rather impressive, reflecting a burgeoning industry:
|
Over the past... |
The ETF's average annual return |
|---|---|
|
3 years |
28.65% |
|
5 years |
22.91% |
|
10 years |
24.02% |
|
15 years |
17.14% |
Source: Morningstar.com.
That's enough to make your mouth water, right? Do remember that these are averages, though, and that the industry is cyclical. In 2022, for example, the ETF sank by nearly 31% (which is one reason it's so attractively priced today). In 2018, it dropped 6%. Those are the only down years in the past decade.
The ETF has an expense ratio (essentially an annual fee) of 0.35%, and recently sported a dividend yield of about 0.4%. It recently encompassed roughly 40 different stocks, with most of them representing a stake in the portfolio of between 2.5% and 3.5%. Here are the 10 top holdings, as of Feb. 27:
- Nvidia
- Cirrus Logic
- Allegro MicroSystems
- Monolithic Power Systems
- Silicon Laboratories
- Lattice Semiconductor
- Ambarella
- Synaptics
- Universal Display
- Skyworks Solutions
Any money spent on shares of this ETF will have you quickly invested in several dozen promising semiconductor companies. Take a closer look at the ETF to see if seems a good fit for your portfolio.
There are other semiconductor-focused ETFs, as well. If you consider others, look not only at their portfolios and performance, but also at their fees. The lower the fee, the smaller bite it will take from your assets.
