SMH - FTXL: Semiconductors With A Value Tilt

2023-12-04 17:59:25 ET

Summary

• First Trust Nasdaq Semiconductor ETF provides exposure to the growing semiconductor industry through a smart-beta strategy.
• The FTXL ETF's top holdings include Intel, Qualcomm, Broadcom, Applied Materials, and Texas Instruments.
• FTXL has a higher expense ratio compared to its peers, but offers a focused approach on U.S. companies in the semiconductor industry.

The semiconductor industry is an essential part of the modern economy, powering everything from computers and smartphones to cars and medical devices. One way to gain exposure to this vital and rapidly growing sector is through exchange-traded funds, or ETFs, like the First Trust Nasdaq Semiconductor ETF ( FTXL ). FTXL seeks to replicate the performance of the Nasdaq US Smart Semiconductor Index. This index follows a smart-beta strategy, meaning it selects and weights its constituents based on specific factors rather than market capitalization. The fund aims to achieve performance results 95% correlated to that of the index, before the deduction of the fund's fees and expenses.

FTXL's Key Holdings

FTXL's portfolio is comprised of 32 stocks. The top five holdings in the fund's portfolio include:

1. Intel Corporation ( INTC ): This is a global corporation and tech firm renowned for the design and production of semiconductor chips.
2. QUALCOMM Incorporated ( QCOM ): This multinational company is an expert in areas such as semiconductors, software, services related to wireless technology, and intellectual property.
3. Broadcom Inc. ( AVGO ): This company stands at the forefront in designing, developing, and providing a wide array of semiconductor and infrastructure software solutions.
4. Applied Materials, Inc. ( AMAT ): Recognized as the leading provider of materials engineering solutions, they contribute to the production of almost every new chip and advanced display globally.
5. Texas Instruments Incorporated ( TXN ): This international firm is dedicated to the design and manufacture of semiconductors, with a focus on the development of analog ICs and embedded processors.

These companies form a significant part of FTXL's portfolio, with Intel Corporation, for instance, accounting for approximately 9.81% of the total fund.

Weightings & Peer ETFs

The weighting of each company within FTXL's portfolio is determined by their score on three factors: volatility, value, and growth. This results in a diverse portfolio that aims to capture the potential of the semiconductor industry while mitigating risk.

When compared to other similar ETFs in the market, such as the iShares Semiconductor ETF ( SOXX ) and the VanEck Semiconductor ETF ( SMH ), FTXL's smart beta approach candidly hasn't worked. The fund has underperformed each sizably, likely because of the value focus with large weightings in companies like Intel as opposed to more momentum/growth plays like Nvidia (NVDA).

This isn't necessarily a bad thing, but when most people think of semiconductor funds, I think they think in terms of high-octane momentum. It's been there in FTXL, but much more so in competitor funds. All this means is that it's got more of a value tilt, which means value needs to be in vogue for this to outperform its peers more broadly.

FTXL's expense ratio of 0.60% is higher than SOXX and SMH's expense ratio of 0.39% and 0.35% respectively. However, FTXL's unique smart-beta strategy and focus on the US semiconductor industry differentiate it from its peers. It just needs a better cycle to operate in favoring value tilts.

Pros and Cons of Investing in FTXL

Pros:

1. Exposure to the Growing Semiconductor Industry: The semiconductor industry is expected to grow at a rapid pace, driven by technological advancements like AI, IoT, and autonomous vehicles.

2. Smart-Beta Strategy: The fund's smart-beta strategy allows it to capture potential upside while reducing risk.

3. Focused on U.S. Companies: The fund only includes U.S.-based companies, reducing exposure to geopolitical risks associated with international investing.

Cons:

1. Sector Concentration: The fund is heavily concentrated in the semiconductor industry, making it more susceptible to industry-specific risks.

2. Expense Ratio: The fund's expense ratio is higher than its peers, which could impact net returns.

Conclusion: To Invest or Not to Invest in FTXL

Investing in First Trust Nasdaq Semiconductor ETF provides exposure to the rapidly growing semiconductor industry. I think if you're looking for exposure to semiconductor stocks with more of a value style, it's a good fund to consider.

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