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Deep Dive

Philip van Doorn

Jan. 19, 2022, 11:08 a.m. EST

These 3 ETFs let you play the hot semiconductor sector, where Nvidia, Micron, AMD and others are growing sales rapidly

By Philip van Doorn

Semiconductor stocks may continue to be an excellent area of the market for investors, even though the prospect of a long period of rising interest rates has put pressure on some high-flying technology stocks.

On Tuesday, investors sent chipmakers’ stocks higher after Taiwan Semiconductor Manufacturing Co. (NYS:TSM) reported double-digit increases in fourth-quarter sales and earnings , and said capital expenditures in 2022 would total between $40 billion and $44 billion.

The reason chipmakers may be one of the best tech-oriented plays: Demand is rising for semiconductors used in vehicles and all sorts of devices.

Below is a screen of 44 stocks held by three exchange traded funds that are focused on the semiconductor industry.

The three funds have varying approaches. First, here are their average annual returns for various periods against those of the SPDR S&P 500 ETF Trust (PSE:SPY) and the Invesco QQQ Trust (NAS:QQQ) , which tracks the Nasdaq-100 Index:

ETF Ticker Average return – 3 years Average return – 5 years Average return – 10 years Average return – 15 years
iShares Semiconductor ETF   (NAS:SOXX)   49.7% 35.4% 27.5% 16.7%
SPDR S&P Semiconductor ETF   (PSE:XSD) 50.1% 32.8% 26.2% 16.5%
VanEck Semiconductor ETF   (NAS:SMH) 50.8% 35.1% 27.0% 18.1%
SPDR S&P 500 ETF Trust   (PSE:SPY)   24.2% 17.8% 16.0% 10.4%
Invesco QQQ Trust   (NAS:QQQ)   25.3% 27.2% 20.4% 15.7%
Source: FactSet

The semiconductor ETFs have outperformed SPY and QQQ by wide margins for all periods. Their performance has been similar, but mixed, with the VanEck Semiconductor ETF (NAS:SMH) taking the prize for the three-year and 15-year periods.

The iShares Semiconductor ETF (NAS:SOXX) has had the best average returns for five years and 10 years. The SPDR S&P Semiconductor ETF (PSE:XSD) ranks second for three years but trails the other two for all other periods on the table.

Here’s more about the semiconductor ETFs:

  • SOXX is the largest, with $9.9 billion in total assets. It holds the 30 stocks in the PHLX Semiconductor Index — the 30 largest U.S. -listed companies (including American depositary receipts for non-U.S. companies) that make computer chips or provide equipment or services used to make them. ADRs are capped at 10% of the portfolio. The ETF is weighted by market capitalization, with limits of 8% for the five largest holdings and 4% for the rest. It is highly concentrated, with the top five stocks (Broadcom Inc. (NAS:AVGO) , Qualcomm Inc. (NAS:QCOM) , Nvidia Corp. (NAS:NVDA) , Intel Corp. (NAS:INTC) and Advanced Micro Devices Inc. (NAS:AMD) ) making up 35% of the portfolio.

  • XSD has $1.6 billion in assets and holds 40 stocks of semiconductor companies of various sizes included in the S&P Total Market Index. The portfolio is equal-weighted and rebalanced quarterly. According to FactSet, the equal weighting “tilts its portfolio away from large, well-known companies and toward smaller growth ones.”

  • SMH has $1.3 billion in assets and holds 25 U.S.-listed stocks or ADRs, selected through a modified cap-weighted methodology that doesn’t put a limit on the percentage of non-U.S. companies in the portfolio. So the largest holding is Taiwan Semiconductor, which makes up 10.5% of the portfolio, while only accounting for 4% of the SOXX portfolio.

There’s something to be said for each of the ETFs’ approaches, and long-term investors looking for the broadest take on the industry might be well-served holding shares of all three.

Now let’s look at forward price-to-earnings ratios based on the consensus estimates for the next 12 months among analysts polled by FactSet, as well as expected compound annual growth rates for sales per share, earnings per share and free cash flow per share through 2023:

Company Ticker Forward P/E Two-year estimated sales CAGR Two-year estimated EPS CAGR Two-year estimated FCF CAGR
iShares Semiconductor ETF (NAS:SOXX) 20.67 10% 11% 15%
SPDR S&P Semiconductor ETF (PSE:XSD) 25.02 11% 19% 23%
VanEck Semiconductor ETF (NAS:SMH) 21.9 11% 12% 15%
SPDR S&P 500 ETF Trust (PSE:SPY) 20.82 6% 9% 12%
Invesco QQQ Trust (NAS:QQQ) 28.29 10% 11% 15%
Source: FactSet

What stands out are the highest P/E valuation for QQQ and the highest expected EPS and free-cash-flow CAGR for XSD through 2023.

XSD is also the most expensive of the three semiconductor ETFs on a forward P/E basis. Then again, it is considerably cheaper than QQQ on this basis and is expected to grow EPS and FCF much more quickly.

Semiconductor stock screen

If we take the three ETF portfolios together, removing duplicates, we’re left with a list of 45 stocks. Consensus estimates for sales per share and earnings per share through calendar 2023 are available for 44 of them. For some, free cash flow estimates aren’t available, and these are marked “N/A.” If a company is expected to report negative earnings for a calendar year, the EPS CAGR will also be marked “N/A.” For more detail on any of the companies, click on the tickers.

The list of 44 semiconductor-industry stocks is sorted by estimated two-year sales CAGR through 2023:

Company Ticker Two-year estimated sales CAGR Two-year estimated EPS CAGR Two-year Estimated FCF CAGR
Wolfspeed Inc. (NYS:WOLF) 36.9% N/A N/A
Marvell Technology Inc. (NAS:MRVL) 26.2% 36.3% 77.7%
Taiwan Semiconductor Manufacturing Co. Ltd. ADR (NYS:TSM) 20.5% 22.2% 52.0%
Analog Devices Inc. (NAS:ADI) 20.5% 14.4% N/A
Universal Display Corp. (NAS:OLED) 20.4% 28.6% 40.1%
SunPower Corp. (NAS:SPWR) 19.6% 75.0% N/A
Monolithic Power Systems Inc. (NAS:MPWR) 19.1% 21.1% 13.7%
Nvidia Corp. (NAS:NVDA) 18.8% 21.2% 37.5%
Micron Technology Inc. (NAS:MU) 16.9% 33.1% 73.1%
Advanced Micro Devices Inc. (NAS:AMD) 16.0% 24.7% 12.9%
Entegris Inc. (NAS:ENTG) 15.5% 16.7% -3.3%
Lattice Semiconductor Corp. (NAS:LSCC) 15.3% 28.7% N/A
Synaptics Inc. (NAS:SYNA) 14.7% 18.7% N/A
Allegro MicroSystems Inc. (NAS:ALGM) 13.5% 21.6% 35.0%
ASML Holding NV ADR (NAS:ASML) 13.1% 18.6% 20.9%
Silicon Laboratories Inc. (NAS:SLAB) 12.6% 32.5% N/A
Smart Global Holdings Inc. (NAS:SGH) 11.9% 11.4% N/A
Synopsys Inc. (NAS:SNPS) 11.6% 14.8% 4.4%
Qualcomm Inc. (NAS:QCOM) 11.6% 13.5% 21.4%
Semtech Corp. (NAS:SMTC) 10.2% 18.6% 18.6%
MaxLinear Inc. (NAS:MXL) 9.8% 12.3% -0.6%
KLA Corp. (NAS:KLAC) 9.8% 12.6% 4.7%
Qorvo Inc. (NAS:QRVO) 9.3% 12.7% 35.4%
NXP Semiconductors NV (NAS:NXPI) 9.3% 11.7% 12.4%
Skyworks Solutions Inc. (NAS:SWKS) 9.1% 10.2% N/A
Applied Materials Inc. (NAS:AMAT) 9.0% 12.6% N/A
STMicroelectronics NV ADR RegS (NYS:STM) 9.0% 15.7% 89.3%
Teradyne Inc. (NAS:TER) 8.6% 11.0% 18.1%
Cadence Design Systems Inc. (NAS:CDNS) 8.5% 10.6% 8.8%
Xilinx Inc. 8.3% 16.8% N/A
Microchip Technology Inc. (NAS:MCHP) 8.2% 10.8% 11.1%
First Solar Inc. (NAS:FSLR) 8.2% -5.7% N/A
Diodes Inc. (NAS:DIOD) 8.0% 13.4% 76.2%
Broadcom Inc. (NAS:AVGO) 7.8% 12.8% N/A
United Microelectronics Corp. ADR (NYS:UMC) 7.7% 6.2% 20.7%
Lam Research Corp. (NAS:LRCX) 7.7% 11.2% #N/A
Power Integrations Inc. (NAS:POWI) 7.2% 4.7% 1.9%
ASE Technology Holding Co., Ltd. ADR (NYS:ASX) 7.0% 2.8% N/A
Cirrus Logic Inc. (NAS:CRUS) 5.5% 9.3% N/A
Rambus Inc. (NAS:RMBS) 5.5% 7.8% 9.6%
ON Semiconductor Corp. (NAS:ON) 5.3% 11.9% 6.4%
MKS Instruments Inc. (NAS:MKSI) 5.3% 5.0% 9.0%
Texas Instruments Inc. (NAS:TXN) 5.3% 5.0% 6.2%
Intel Corp. (NAS:INTC) 2.1% -15.7% -54.7%
Source: FactSet

Wolfspeed Inc. (NYS:WOLF) is expected by analysts to achieve the most rapid pace for sales growth through 2023. However, it isn’t expected to turn an annual profit until 2023, so the EPS CAGR is marked “N/A.”

Any stock screen is limited, but can help you begin your own research. Click on the tickers for more about each company. Click  here  for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

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