Semiconductors are those little chips or circuits that are essential to drive computers, appliances, electronics, and all other manner of technology.
They have also driven the stock market in recent years, with many of the companies in this industry posting huge gains over the past decade. In fact, only three other industries have outperformed semiconductors over the past 10 years.
It can be a little confusing for investors, because often, semiconductor stocks are lumped in with other types of technology stocks in technology-focused exchange-traded funds (ETFs). A good broad-based technology ETF should be a pillar of a diversified portfolio, but investors might want to add a little more alpha with an ETF that includes only stocks from the booming chipmaking industry.
The best semiconductor ETF
There are quite a few ETFs that focus just on semiconductors, but the best, and broadest, is the SPDR S&P Semiconductor ETF (XSD -0.25%). This ETF tracks the S&P Semiconductor Select Index, which includes semiconductor companies within the S&P Total Market Index. So, as it draws from that broad market index, it includes semiconductor stocks of all sizes — large, mid, and small caps.
Overall, it holds about 39 stocks and is equally weighted, which means the big companies, like Intel, Nvidia, and Advanced Micro Devices, have roughly the same weight in the portfolio as smaller companies like Cirrus Logic and Allegro MicroSystems. The equal weighting gives the fund a little more diversification than a market-cap weighting ETF would, which helps it outperform in down markets.
If you look at this ETF’s performance last year, it was down about 30.8% in 2022, while the Nasdaq Composite, a barometer for technology stocks, was down about 33%. More specifically, the Invesco QQQ, an ETF that tracks the Nasdaq 100, was down about 32.6% last year.
But if you look at the longer-term numbers, the SPDR S&P Semiconductor ETF outperforms the Nasdaq and the QQQ. It was juiced over the course of the bull market by a more-concentrated portfolio focused on a high-performing industry.
Over the past three-, five-, and 10-year periods through Jan. 31, the SPDR S&P Semiconductor ETF has had average annual returns of 24.7%, 22.4%, and 24.1%, respectively. As the chart shows, over the last 10 years through Jan. 31, the Nasdaq Composite has an annualized return of 15.1% while the Invesco QQQ has posted a 17.1% annual return.
It also performed better over the past one-, three- and five-year periods than many other semiconductor-focused ETFs.
A booming industry
While the names of companies prospering in the industry might change, semiconductors aren’t going anywhere. In fact, in this digital age, they are just going to become increasingly essential. A recent report from Fortune Business Insights projected that the global semiconductor industry will more than double in size by 2029, from roughly $528 billion in 2021 to $1.4 trillion by 2029.
You could try to pick the best semiconductor stock, and there are a lot of good ones. But a better strategy to tap into the growth of semiconductors is an ETF like the SPDR S&P Semiconductor ETF.
As a concentrated sector ETF, it should only represent a small portion of your portfolio and be balanced out with a diversified mix of stocks and ETFs. But it would certainly be an excellent choice to fill any aggressive growth void you may have.
Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Intel, and Nvidia. The Motley Fool recommends Cirrus Logic and recommends the following options: long January 2023 $57.50 calls on Intel, long January 2025 $45 calls on Intel, and short January 2025 $45 puts on Intel. The Motley Fool has a disclosure policy.