2023-06-29 06:00:09 ET
Summary
- Invesco PHLX Semiconductor ETF is a relatively new fund that invests in large-cap semiconductor companies in the US.
- The fund has demonstrated strong performance in the past year but contends with high concentration risk due to its focus on large-cap semiconductor companies and a small number of holdings.
- Several of SOXQ's top portfolio companies have announced new developments and projects that could drive growth for the fund.
Strategy
Launched and managed by Invesco Capital Management LLC, Invesco PHLX Semiconductor ETF ( SOXQ ) invests in stocks of companies operating across the United States semiconductor industry. Holdings include information technology companies as well as companies involved in the design, distribution, manufacturing, and sale of semiconductors. SOXQ invests in growth and value stocks of large-cap companies and seeks to track and replicate the performance of the PHLX Semiconductor Sector Index. The fund was incepted in 2021 and has accumulated an AUM of nearly $130 million. The index is reconstituted on an annual basis and rebalanced on a quarterly basis.
Holding Analysis
SOXQ invests in a total of 33 large-cap semiconductor companies and selects and weights its holdings through a market-cap weighting methodology. As a result, there is a heavy skew towards the top 5 holdings within the fund's top 10 holdings. The weightings of the top 5 holdings range from 7% to 8%, while the latter 5 holdings are all within the 4% range. Altogether, the top 10 holdings constitute nearly 60% of the entire fund's portfolio. While the fund focuses extensively on holdings in the United States, the fund will allocate roughly 8% to holdings in the Netherlands and Taiwan. Moreover, SOXQ allocates 95% of holdings to large-cap companies and 5% of holdings to mid-cap companies.
Performance Analysis
Being launched in 2021, SOXQ is a relatively new fund with just over 2 years of activity in the market. Despite being a small and new fund, SOXQ has demonstrated strong performance in the past year. The fund was closely following the total return of the S&P 500 in the 2nd half of 2022, and in February 2023, the fund began to outperform the broader index, and the gap between the two has become increasingly wider throughout 2023. As of right now, SOXQ's total return sits at 36%, which is more than double that of the S&P 500's total return at 14%. This is especially noteworthy considering that Gartner predicts that the global semiconductor revenue will decline by 11% in 2023. Based off of SOXQ's performance, this is nowhere near the case as the fund is currently experiencing a strong uptrend that is even outperforming the S&P 500. Moreover, SOXQ has a low expense ratio at 0.19%, which is significantly less than its 5 closest peers. The fund with the 2nd lowest expense ratio is XSD at 0.35%.
High Concentration, Risk, and Volatility
The key area in which SOXQ falls short is its highly concentrated focus on large-cap semiconductor companies. The fund is already extremely new and has the lowest AUM, at $131.88 million, among all of its 5 closest peers. On top of that, only investing in 32 holdings does not help the fund mitigate concentration risk. If we look at a fund like XSD, the fund has reported nearly 200% growth in its price in the past 5 years, whereas SOXQ is only up 14% since its inception. XSD invests in 39 holdings, which is also a small amount, but the key differentiator is that the fund has an equal distribution of weighting throughout its top 10 holdings. XSD's top 10 holdings range from 2.88% to 3.19%, allowing the fund to significantly reduce concentration risk. Moreover, Seeking Alpha assigns SOXQ a risk grade of D-. While the fund surprisingly has a low turnover rate, its annualized volatility of 37% is especially high, which is nearly double that of the median of all ETFs. The fund also has a notably high standard deviation and tracking error for 1 year, all of which adds to the fund's high volatility and risk.
Developments In Top Portfolio Companies
I believe that SOXQ has significant upside potential, as many of the fund's portfolio companies are coming out with new developments and projects that can drive growth for the fund as a whole. Most notably, Nvidia ( NVDA ) has announced that the company will be bringing its AI computing platform to cloud data company, Snowflake. Nvidia's will allow Snowflake to use its NeMo platform, which is used to generate AI models, in Snowflake's Cloud Data. This could significantly drive growth for Nvidia as it allows the company to leverage and outsource their own data to train new AI models.
Applied Materials ( AMAT ) has also announced its plan to invest $400 million in a new engineering center in India. This was primarily a result of Prime Minister Narendra Modi's request for the company to strengthen the chip industry in the India. Moreover, the new project is expected to support more than $2 billion of planned investments, which will also create 500 new advanced engineering jobs. I am confident that this development will also drive growth for not only India's semiconductor industry but also for Applied Materials itself.
Similar to Applied Materials' new project, Micron Technology ( MU ) has also confirmed its investment of up to $825 million in a new semiconductor facility in Gujarat, India. Alongside Micron's investment, this project will be supported by both the Indian central government as well as the state of Gujarat. The total investment in the facility will be $2.75 billion. Upon completion, the project will create up to 5,000 new jobs for Micron.
Both Nvidia and Applied Materials are within the fund's top 10 holdings, each holding 8.42% and 4.11%, respectively. Micron sits at a lower weighting at 3.71%. Regardless, the developments in these companies can significantly drive growth for SOXQ in the immediate to near term.
Restrictions On AI Chip Exports
The United States is considering new restrictions on exports of AI chips to China, which has ultimately caused Nvidia and Advanced Micro Devices shares to fall by 1.5%. This restriction was prompted by concerns surrounding China's usage of AI chips for weapon development and hacking. The US Commerce Department may take action in the upcoming weeks to prevent the shipments of chips made by companies like Nvidia to customers in China without a special US export license. Ultimately, this move has the potential to be a considerable threat to SOXQ as Nvidia is the top holding in the fund, and this restriction could cause Nvidia's performance to decline in the near term.
Final Thoughts
Overall, SOXQ has demonstrated strong performance in the past year, and it has even outperformed the S&P 500 with a total return rate of 36%. This is especially impressive given that industry outlook for semiconductors do not look favorable right now. Semiconductor revenue was projected to decline by 11% in 2023, but this ETF has effectively defied industry trends. Given SOXQ's stellar performance, the fund also contends with high concentration risk, which stems from the fund's high percentage of top 10 holdings. This then leads to higher risk and volatility. Moreover, many of SOXQ's top portfolio companies also have exciting new developments that may drive growth for these companies, and ultimately the fund. I believe that large-cap semiconductors are headed for a year of high growth, and I rate SOXQ a Buy.
For further details see:
SOXQ: Large-Cap Semiconductors Defying Industry Headwinds