The Invesco Semiconductors ETF (PSI +2.80%) isn't the fastest-rising exchange-traded fund tracking the microchip industry. And it's only the fifth-largest ETF in this field, counting by the amount of assets under management.
But the Invesco fund provides a unique feature that you won't find in larger semiconductor ETFs like the VanEck Semiconductor ETF (SMH +1.71%) or the iShares Semiconductor ETF (SOXX +2.01%).
You see, more than 21% of the gigantic VanEck fund is invested in Nvidia (NVDA +0.52%) stock. The iShares ETF isn't far behind with a 9.2% commitment to Nvidia stock. But unlike the larger ETFs, that designer of accelerator chips for the artificial intelligence (AI) industry is not the Invesco fund's largest holding. In this case, Nvidia shares account for just 6.1% of the ETF's total portfolio.
In other words, this is one place to go if you feel that you missed the boat on Nvidia's market-stomping gains and would rather diversify your chip-sector investment across many stocks not named Nvidia.
NASDAQ: NVDA
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Is it too late to buy Nvidia?
Many investors are still buying Nvidia stock hand over fist. Bulls would argue that the early leader in AI-training hardware won't be moved, setting the company up for many years of market-beating success.
I'm not confident in that analysis. The AI market is teeming with hopeful challengers, including longtime arch-rival Advanced Micro Devices and semiconductor pioneer Intel. Nvidia may hold an edge over these usurpers in terms of pure performance, but the Intels and AMDs of the world can put up a fight when it comes to pricing, power consumption, and cooling requirements. And in a world where each AI-training supercomputer already holds thousands of accelerator chips, you can win contracts with pricing or systems architecture benefits. In other words, Nvidia could very well lose its iron grip on the AI accelerator market.
I sold one-third of my Nvidia holdings in February, moving a substantial two-year profit over to a more affordable growth stock. I'm not giving up on Nvidia at this point, just hedging my bets a bit. But Nvidia shares certainly don't look like a buy at today's lofty valuation. The stock is a solid hold in my view, with bearish overtones emanating from the horde of prospective AI rivals.
NASDAQ: SOXX
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What's wrong with the VanEck and iShares semiconductor ETFs?
So if I'm buying semiconductor ETFs today, I'm happy to skip the ones that lean too heavily on the Nvidia pillar. Nvidia utterly dominates the semiconductor industry with a $2.2 trillion market cap and floats near the stock-price top at $900 per share. Therefore, I'd rather not grab ETFs that blindly give more weight to high-priced stocks or large market caps.
The $2 billion iShares fund mirrors the NYSE Semiconductor Index. This index tracks the 30 largest semiconductor stocks on American stock exchanges, measured by market cap. The weighting relies on market caps, with a hard weighting limit of 8% at each quarterly rebalancing. Nvidia started there and has outperformed its peers since the March rebalancing. I can live with this approach, but it's still not perfect.
NASDAQ: SMH
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The VanEck Semiconductor ETF is the largest name in the business with $18.6 billion of assets under management. It tracks the MVIS US Listed Semiconductor 25 Index, which reflects the performance of the 25 largest semiconductor (or semiconductor manufacturing equipment) companies in the industry. Like the NYSE index, there's a hard cap on each stock's maximum weighting at each rebalancing. But it's a lofty 20% ceiling, from which Nvidia has risen to a 21% weighting. Without the cap, Nvidia would represent 39% of the MVIS index and VanEck ETF today, so the capping policy makes a difference. But it's even further from my goals than the NYSE and iShares variant.
NYSEMKT: PSI
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Invesco does it differently
This fund tracks an unusual sector index.
Managed by the NYSE, the Dynamic Semiconductors Intellidex Index seeks broad exposure to the microchip sector. Culled from the 2,000 largest stocks on American stock exchanges, the index's quarterly rebalancing gives equal weight to each component. So the largest component of the Invesco Semiconductor ETF today is memory-chip giant Micron Technology with a 6.8% weight.
At the other end of the spectrum, the smallest contributors to the Invesco fund's performance are connectivity expert Credo Technology and power management specialist Qorvo at 2% and 2.2%, respectively. In a cap-weighted index like the VanEck or iShares system, Qorvo's weight stops at 0.3% and Credo would grab a 0.1% slice of their current rosters.
So you can pick the iShares or VanEck ETFs if you want to bet on winners continuing their winning ways. The Invesco fund brings a broader approach to the chip sector as a whole, giving smaller names a chance to pull their weight.
The next rebalancing is scheduled for the last Friday of May, three weeks down the road. That will reset Nvidia to a 3.3% slice of this investment vehicle with 30 members -- right alongside Qorvo, Micron, and Credo. You should consider this interesting ETF today if you want to invest in a wide variety of semiconductor companies without worrying about a single stock dominating your portfolio. And yes, you're still going to benefit if Nvidia keeps winning the AI hardware race.
