Noted for their simplicity and other advantages over mutual funds, exchange-traded funds have become a popular investing tool.

ETFs hold collections of stocks that share certain elements. Investors bullish on future growth in the semiconductor sector, for example, can turn to Semiconductor HOLDRs or iShares S&P GSTI Semiconductor. But since these ETFs invest in a number of companies, their broad diversity also limits your upside.

Fear not, Fool -- in this edition of "ETF Teardown," we'll use some nifty tools to drill into the best investments in the semiconductor sector. To help, we'll use Motley Fool CAPS, our tool for screening and ranking stocks and stock pickers.

The power of tags
To help investors locate great stocks quickly, CAPS-rated stocks can be "tagged" with descriptors that group the company with others in the same category -- "Silver," for example, or "Royalty Trust."

Selecting the Semiconductor -- Specialized label in CAPS gives you a list of 43 companies that trade on American exchanges. This particular collection of investments has outrun the general market in the past year, up 18%, while the S&P 500 has dipped by 1%.

To gauge which companies the CAPS community thinks offer good opportunities in the market for specialized semiconductors, we'll sort these businesses by their CAPS star rank, from one to the maximum five stars. We'll then examine the individual companies to see who -- from Wall Street to Main Street -- is bullish or bearish on the business, and why.

Down to the nitty-gritty
Here are some specialized semiconductor stocks I've pulled from CAPS today.

Company

CAPS Rank

NVIDIA (Nasdaq: NVDA)

*****

Ultra Clean Holdings (Nasdaq: UCTT)

*****

Sigma Designs (Nasdaq: SIGM)

****

Silicon Laboratories (Nasdaq: SLAB)

****

Trina Solar (NYSE: TSL)

**

First Solar (Nasdaq: FSLR)

**

Mr. Clean
Not a chip maker itself, Ultra Clean builds the sophisticated equipment that lets semiconductor manufacturers produce dies at acceptable yield levels. But it doesn't sell its products directly to chip makers. Instead, it builds critical subsystems for much larger companies that supply capital equipment -- companies such as Applied Materials (Nasdaq: AMAT) and LAM Research.

Because the manufacturing of today's semiconductors requires such high levels of precision in a clean environment, expertise in the design and maintenance of fabrication tools is in limited supply. This situation gives Ultra Clean a sizable moat -- toolmakers can't just call up any old supplier to meet their needs. The specialized gas and liquid chemical delivery systems are more like rocket science than anything you'll find by flipping open the phone book.

Yet despite its specialized skill set and intellectual property in wafer-making systems, Ultra Clean is still subject to cycles in the semiconductor market. In fact, stock in the company has dropped 40% since missing the mark in its latest earnings report. But the lower stock price has yielded an attractive forward earnings multiple of just a little more than 8, and many CAPS investors like a cheap stock with a strong moat. Indeed, the vast majority of CAPS investors rating the company -- 305 out of 310, to be exact -- are betting that revenue growth will eventually return and that the company will beat the S&P in the future.

Sun power lacks star power
A few companies on the opposite end of the valuation spectrum serve an oft-discussed specialized industry -- solar energy. Many firms are targeting different segments within the burgeoning market: First Solar sells thin film solar modules for grid-connected plants, mostly in Europe, whereas Trina Solar is a vertically integrated supplier in China.

But what many solar firms have in common is rich valuation -- and CAPS investors are generally skeptical of the potential in a sector with such high stock prices. Trina Solar is not too far out, with a forward multiple of 18.7, but First Solar trades at an astounding 120 times earnings for the next 12 months. High valuations coupled with an industry driven by government subsidies have led enough CAPS investors bearing on these solar firms to plant them firmly in the two-star category.

You can lead a horse to water ...
Plucking individual stocks from any technology sector is, of course, a high-risk endeavor. Investors should always perform their own due diligence on companies rather than take a recommendation. After all, even the best stock pickers can be horribly wrong.

So, do you agree that capital-equipment suppliers are the best place to be in semiconductors? Or are solar companies still a better play? Give your opinion in Motley Fool CAPS.

NVIDIA and Silicon Labs are Motley Fool Stock Advisor selections. To see what stocks have helped the service beat the market by 37 points on average, take a free 30-day trial.

Fool contributor Dave Mock loves doing the teardown part -- it's the put-back-together part he hates. He owns shares of NVIDIA. Sigma Designs is a Rule Breakers recommendation. Dave is the author of The Qualcomm Equation. The Fool has a disclosure policy.