ETF Insights Report – iShares Semiconductor ETF – SOXX

iShares Semiconductor ETF – SOXX

The investment seeks to track the investment results of the NYSE Semiconductor Index composed of U.S. equities in the semiconductor sector. The fund generally will invest at least 80% of its assets in the component securities of its index and in investments that have economic characteristics that are substantially identical to the component securities of its index and may invest up to 20% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The fund is non-diversified.

Focus area	Score	★★★★★
Performance (CAGR)	20.32%	★★★★★
Fees (MER)	0.35%	★★★★
Volatility (Beta)	1.44	★★
Distribution (Yield)	0.94%	★★
Valuation (Forward P/E)	20.83	★★★
5-year earnings growth	11.24%	★★★★

Pros

Owning the fund mitigates some volatility compared to selecting single stocks in the semiconductor/AI space
AI is in its infancy, and we can expect amplified growth in terms of semiconductor and data center demand
The fund isn’t the best performing of semiconductor options but it is also the most diversified and least concentrated in major players

Cons

Valuations are high. I would deem the AI space to be “priced to perfection,” meaning that earnings and revenue must grow in line with or even above expectations, or we will see multiple contraction
If you are an NVIDIA bull, the company’s exposure in this portfolio is not as extensive as something like the VanEck Semiconductor ETF (SMH)

The iShares Semiconductor ETF’s objective is to give investors exposure to a wide portfolio of semiconductor and AI-related companies.

It is an index fund that tracks the NYSE Semiconductor Index and invests at least 80% of its assets in the index itself. With the remaining 20%, the fund managers can either choose to continue investing that capital in the index or utilize future or options contracts to amplify returns. For the most part, though, the bulk of the fund is invested in the index.

We’ll discuss this more in the competing funds section, but SOXX takes a unique approach in that it isn’t particularly aggressive on any single player in the space and instead maintains a relatively equal-weight top 5 holdings, give or take a few percent.

Because this is an index fund, the focus should be on the NYSE Semiconductor Index. The index methodology is called a “modified float-adjusted market capitalization-weighted index.” On the surface, this seems confusing. But it’s relatively simple.

A company’s share “float” is the shares available to the public to trade. While the total shares outstanding of a particular stock can contain stocks held by insiders, employees, and institutions, the float excludes these to give a better idea of the shares available for trading when it comes to retail investors.

This index will take the 30 largest semiconductor companies, factor in their floats, and then allocate a certain percentage of the index based on that. A company with a large market cap but a lower float would have a lower allocation.

Many of these large semiconductor companies will have ample floats and it really doesn’t impact the allocations all that much.

The fund heavily favours U.S.-based companies but does have some international exposure in the form of Taiwan Semiconductor.

Sector Risk	High
Concentration Risk	Low
Geographical Risk	High
Liquidity Risk	Low

One of the largest risks of this fund is valuation. I view many semiconductor plays as “priced to perfection,” meaning the companies must continue to fire on all cylinders and likely exceed analyst expectations to keep valuations at the current levels. It isn’t as bad as prior because of the market correction in early 2025, but valuations are still high.

If they were to falter or show slowing growth, we would no doubt see multiple contraction, meaning the price-to-earnings ratios the market is willing to pay for these semiconductor companies would lower, ultimately lowering the price of SOXX. Many companies inside of SOXX are trading at valuation multiples that require extensive growth, and there is little margin of safety, if any.

Although exposure to the sector is sought after by many due to the explosive growth potential, it is important to take a level-headed approach and realize the potential downside that can occur.

Another area of risk is concentration in the United States. The semiconductor industry is global. SOXX takes a concentrated approach to the U.S., except for a single name in Taiwan Semiconductor. The fund could underperform if the global market were to experience faster growth than the U.S.

Top 10 Holdings	Allocation
Broadcom (AVGO)	8.41%
NVIDIA (NVDA)	8.29%
Texas Instruments (TXN)	7.83%
Advanced Micro Devices (AMD)	7.02%
Qualcomm (QCOM)	6.61%
KLA Corp (KLAC)	4.49%
Applied Materials (AMAT)	4.29%
Lam Research Corp (LRCX)	4.20%
Intel (INTC)	4.11%
Monolithic Power Systems Inc (MPWR)	4.05%

As you can see from the top holdings, this fund contains the premiere semiconductor and AI names in the United States. Although Taiwan Semiconductor is inside the portfolio, it slides just outside of the top 10 with a low single-digit weighting.

A purchase of SOXX is a bet on the expansion and growth of the AI and semiconductor space globally, but this depends on the continued results of U.S. corporations to capitalize on that growth. Although NVIDIA, the top holding inside of this portfolio, is somewhat of a semiconductor play, its growth at this stage is attributed mainly to the rapid expansion of data center demand due to artificial intelligence.

When we look to companies like Broadcom, Qualcomm, and Advanced Micro Devices, those will be the more pure-play semiconductor options. However, I believe many investors are purchasing funds like SOXX to get exposure to the AI industry as a whole, and not so much the semiconductors in particular.

Many investors may not realize that there is plenty of growth available for semiconductors outside of the AI space, be it automobiles, devices, medical devices, or renewable energy. So, this fund provides a little bit of both worlds. However, many of the companies inside of it are at extensive valuations due in large part to AI growth.

	SOXX	SMH	PSI
Returns		✅
Diversification	✅
Fees		✅
Tax efficiency	✅
Distribution		✅

If you look to the returns above, SMH is clearly the best option. However, what is important to note about these funds is that SMH is a much more concentrated play in two companies in particular: NVIDIA and Taiwan Semiconductor. At the time of update, the two stocks make up over 32% of SMH’s entire assets. So, the outsized performance of NVIDIA and, to a lesser extent, Taiwan Semiconductor has driven most of its returns.

This could continue in the future, and SMH could continue to be the better performer, but there is no doubt the opposite could also be true. If these two companies take a step back in terms of performance, SMH will be impacted much more than something like SOXX. To give you an idea of how much more concentrated SMH is, the top five holdings of SOXX have the same weight as the top 2 holdings of SMH.

Regarding PSI, performance has been impacted to a small extent by higher fees, but primarily because it has lower exposure to the major chip players in the United States. Its portfolio consists of many more small-cap options, with the fund being around 27% allocated to small caps, whereas SOXX has virtually none. The AI race, thus far, has been dominated by the larger players with better infrastructure and cash flows. I’d expect this to continue moving forward.

The temptation to opt for SMH over SOXX due to the outstanding performance of NVIDIA and Taiwan Semiconductor is undoubtedly there. Still, I’d expect the fund to be significantly more volatile if the results of these two companies aren’t up to par. Considering my risk tolerance, I think the risk/reward situation favours SOXX a bit more, and it would be the fund I’d opt for.

However, if you’re bullish on NVDA and TSM, you could consider SMH. Just understand that it comes with a much higher concentration risk.

Yield	0.94%
Frequency	Quarterly

SOXX pays a very small distribution, yielding only around 1%. This makes it a more tax-efficient option, but those seeking income will have to go elsewhere. For the most part, I believe the subset of investors who are interested in AI and semiconductor stocks are not really looking to generate a stream of cash flows from the investments but are more focused on generating total returns from the funds they hold.

If you’re looking for a pure-play United States semiconductor/AI fund, SOXX is an outstanding option. Yes, there is a Canadian play by Global X that trades under the ticker CHPS, but this is a global play and doesn’t have even close to the U.S. allocations SOXX has.

Its pure-play focus on the United States allows it to hold higher quality names, but that comes with the risk that emerging and developed markets outside of the U.S. start to capture more of the AI space and grow at a faster rate. In this situation, it would likely underperform even a fund like CHPS. Still, overall, I’d say a bet on large-scale U.S. corporations is one that has a better chance of working out than not.

There has yet to be a Canadian ETF that focuses strictly on U.S. names, so if you want this exposure, you’ll have to convert currencies and head south of the border to find funds. One has to consider that with this being a U.S.-listed fund, you are also exposed to currency fluctuations when it comes to the CAD and USD.

Investors bullish on companies like NVIDIA and Taiwan Semiconductor will likely find something like SMH more interesting. However, with the state of the sector and the sky-high valuations, if I were to own one of these funds in my own portfolio, I would do so with a more diverse, less concentrated portfolio to mitigate the risks of one of these companies reporting lacklustre results.

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