Artificial intelligence (AI) semiconductor giant Micron Technology (MU +1.56%) recently became the latest U.S. company to join the prestigious $1 trillion market capitalization club after a run in which the stock gained an eye-popping 900% over the past year.
While the $1 trillion club is growing, it's still rarefied territory, and it's not every day companies gain entry. Micron's ascent is also interesting to exchange-traded fund (ETF) investors because the stock's surge exposes a flaw in the market-cap weighting methodology used by many traditional chip ETFs. Put simply, some of those funds had fairly low exposure to Micron as recently as six months ago.
Owing to a different approach, the First Trust Nasdaq Semiconductor ETF (FTXL +2.21%) was better positioned for the Micron rally because it weights metrics beyond market value.
The First Trust Nasdaq Semiconductor ETF is benefiting from Micron's rally, but it has some quirks. Image source: Getty Images.
What sets this chip ETF apart
Roughly 420 ETFs feature Micron as a top-15 holding, according to one source. Among non-leveraged funds with stakes in this stock, the king of the hill is the newly minted Roundhill Memory ETF (DRAM +0.11%), which allocates 28% of its portfolio to Micron as I write this.
That fund focuses on dynamic random access memory (DRAM) chipmakers, so it's not as diverse as the other chip ETFs with Micron exposure. Still, the extent to which Micron is a staple in basic semiconductor ETFs varies. The First Trust Nasdaq Semiconduct ETF devotes rouglhy 11% of its portfolio to Micron, its top holding as I write this.
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Key Data Points
At times, the First Trust Nasdaq Semiconductor ETF's Micron stake has been even heftier, but the point I want to make is that the fund has frequently been more exposed to the stock than some rivals. That's the result of this $2.5 billion ETF tracking the Nasdaq U.S. Smart Semiconductor Index, which ranks chip stocks based on the companies' cash flow, gross income, momentum, and return on assets (ROA).
From there, the stocks making the cut for inclusion are weighted by cash flow. From the fund's large stake in Micron, it can be inferred that the company is an adept cash-flow generator, and it is. In the most recently reported quarter, Micron notched $11.9 billion in operating cash flow.
An interesting but not perfect ETF
There are takers for the First Trust Nasdaq Semiconductor ETF. Its $2.5 billion in assets under management confirms as much. Some investors may want an alternative cap-weighted play on semiconductor equities. With Micron a $1,000 tech stock, some capital-constrained market participants may opt for ETFs to gain exposure to the stock.
Still, this fund isn't perfect. Prospective investors should note that when the ETF's index rebalances twice a year, the largest weight assigned to its holdings is 8%, meaning the Micron weight they see today may eventually be reset to 8% and forced to regrow from there.
Additionally, this ETF charges 0.60% per year, or $60 on a $10,000 investment. That's toward the high end of passive, non-leveraged semiconductor ETFs.
