4 Best ETFs for Capitalizing on the Semiconductor Market Surge

Key Points

• Semiconductor ETFs dipped over the summer as investors turned to other industries, but many of these funds are once again rising toward the end of the year.
• Semiconductor ETFs provide exposure to both U.S.-listed and global chipmaker stocks.
• Leveraged semiconductor firms offer investors a chance to make a concentrated bullish or bearish bet on the market over a short period.

Driven by demand from cloud computing and AI, semiconductor sales have skyrocketed in recent months as pressure due to supply chain concerns and inflation has eased. The specialized chips that power these popular technologies are in such high demand that makers of these products now represent three of the 10 largest companies in the world by market capitalization—NVIDIA Corp. NASDAQ: NVDA, Taiwan Semiconductor Manufacturing Co. Ltd. NYSE: TSM, and Broadcom Inc. NASDAQ: AVGO, each of which has a market cap of at least $833 billion.

Notably, the semiconductor market appears to be still heating up. Global semiconductor sales for August 2024 reached more than $53 billion, a 20.6% increase year-over-year and the fifth consecutive month-to-month improvement. Demand was particularly strong in the U.S. and Asia. China's assertive stimulus policy has prompted a surge in domestic chipmaker stocks in recent weeks, which is not reflected in August's global sales figures.

Bets on individual semiconductor makers have been a popular choice for many investors, with NVDA shares nearly tripling in the last year and both TSM and AVGO stocks more than doubling during that time. Some investors may prefer a broader approach, though, to capitalize on the ongoing surge in the U.S. or the global semiconductor spaces. In these cases, there are a number of ETFs providing different types of exposure to this market.

SMH: Top-Performing Non-Leveraged Chip ETF

The VanEck Semiconductor ETF NASDAQ: SMH provides reasonably broad coverage of the semiconductor space by targeting more than two dozen U.S.-listed chipmakers. Setting it apart from other U.S.-focused semiconductor funds is SMH's inclusion of chip manufacturers of different market capitalization levels, allowing for exposure beyond the largest companies.

SMH has outperformed all other non-leveraged semiconductor ETFs year-to-date, with a total return of nearly 42% in that time and a one-year increase of more than 68%. In the competitive ETF space, where fees for funds are often driven lower, SMH has a moderate expense ratio of 0.35%. This is in line with several other ETFs with a similar focus. VanEck's semiconductor fund also has a healthy asset base of more than $24 billion and strong liquidity based on average trading volumes.

SOXQ: Low Fee Alternative

The Invesco PHLX Semiconductor ETF NASDAQ: SOXQ is just a few years old, making it one of the newest semiconductor-focused funds available. It focuses on a pool of about 30 U.S.-listed and large-cap semiconductor companies, with major players like NVIDIA and Broadcom representing outsized portions of the portfolio.

SOXQ sets itself apart by its expense ratio of just 0.19%. The fund has undercut many other established semiconductor ETFs, drawing cost-conscious investors and those interested in buying and holding.

Given its smaller assets under management and lower liquidity levels than better-known rivals, a buy-and-hold strategy may also be best for SOXQ.

SEMI: Global Exposure

While many semiconductor ETFs focus on a small pool of U.S. companies, the Columbia Seligman Semiconductor & Technology ETF NYSEARCA: SEMI provides global exposure.

Although its portfolio remains relatively small, at about 30 holdings, and major players like NVIDIA still dominate, SEMI is nonetheless one of the most diverse semiconductor funds available.

This diversity gives investors access to a broader range of growth opportunities. By including international companies, SEMI stands out from other funds with a more limited geographic focus.

SOXL: Leveraged Semiconductor Fund

Investors looking to take a more active approach to trading may wish to make use of leveraged funds. In this area, the Direxion Daily Semiconductor Bull 3X Shares ETF NYSEARCA: SOXL stands out for its 3x-long exposure to a pool of top U.S. semiconductor companies. SOXL dominates the leveraged semiconductor ETF space in terms of liquidity, which is key for investors because the fund's leverage resets daily.

This daily reset means traders must be cautious of volatility over multiple days, as the compounding effect can significantly impact overall returns. For this reason, SOXL is generally best suited for short-term trades rather than long-term holds, allowing investors to take advantage of sharp price movements in semiconductor stocks without holding the risks of daily compounding over an extended period.

Rotation Back Into Semiconductor Stocks?

Some investors shifted away from semiconductors ahead of the Fed's September rate cut. SMH and other semiconductor funds tumbled in July as a result. However, in the final quarter of the year it appears that semiconductor firms are back on track for continued gains, although the industry remains heavily dependent on a small number of very large names. ETFs focused in this space can help to mitigate the risk of individual chipmakers while still providing exposure to the industry as it continues to heat up.