Exchange traded funds (ETFs) make it harder to justify individual stock picking for retail investors, especially in the technology sector. There's no better example of what can happen to overzealous investors than looking at the epic fall of Apple (Nasdaq:AAPL). Remember when that stock was $700? Now it's well under $500, and that damage has happened over a few months rather than years.

Top Investment Trends For 2013: We go over a few investment trends for you to think about for 2013.

Compare that to the most widely traded technology ETF, the PowerShares QQQ (Nasdaq:QQQ), which is down only fractionally over the same period. There are many benefits of ETF investing, and for investors who believe in a certain sector of the economy, ETFs provide exposure to a basket of stocks in the sector of their choice.

The PowerShares QQQ may provide broad exposure to the technology sector, but as investors know, that sector is huge. One subsector of the technology space that has caught investors' eyes is semiconductors.

Recent uptrends in stocks like QUALCOMM (Nasdaq:QCOM) and Texas Instruments (Nasdaq:TXN), a name that has seen nearly 20% upside since October, are proving these stocks to be compelling buys for the first half of 2013. To mitigate the risk that comes from such a volatile sector, three ETFs might be appropriate.

The Market Vectors Semiconductor ETF (ARCA:SMH) is up a mere 2% in the past 52 weeks, but that follows an impressive recovery from its November lows. With an expense ratio of 0.35% - below the category average of 0.52% - the fund is an efficient way to play the space.

There is reason for caution, however. Nearly 35% of the fund's holdings are concentrated in two companies: Intel (Nasdaq:INTC) and Taiwan Semiconductor (NYSE:TSM). For this reason, investors have to believe strongly that Intel will not fall victim to the dwindling popularity of the PC, and Taiwan Semiconductor won't suffer the same type of mean reversion that Apple did.

Another ETF worth researching is the iShares PHLX SOX Semiconductor Sector Index Fund (Nasdaq:SOXX). This fund is better diversified than SMH, with no one current holding representing more than 8.5% of the total weight of the fund. It still invests in many of the major semiconductor companies including Texas Instruments, Intel, Taiwan Semiconductor and Broadcom (Nasdaq:BRCM).

The fund's expense ratio is 0.48%, higher than SMH, but still lower than the industry average.

The SPDR S&P Semiconductor ETF (ARCA:XSD) is the most diversified fund of the three. With an expense ratio of 0.35%, it's on par with SMH. Within the fund's 50 holdings, none of the top 10 makes up more than 3% of the fund's weight. In addition, they aren't the same names that show up in the previous two ETFs.

Names like Cree (Nasdaq:CREE), Advanced Micro Devices (NYSE:AMD), On Semiconductor (Nasdaq:ONNN) and Micron Technology (Nasdaq:MU) are in the fund's top 10 holdings.

Which Is Best?
Like all ETFs, even those that track the same sector or subsector of the economy can have very different results. Over the past 52 weeks, The Market Vectors Semiconductor ETF has performed the strongest with returns of about 2.3%. SOXX was a close second with returns of 1.8%, and XSD was a distant third, with a return of minus 4.3%.

It's clear that the funds that tracked the larger, better-known names performed better over the past year.

The Bottom Line
Investing in the technology sector is known to be very volatile. When investors think of the semiconductor space, they often think of computers, but the companies that make up these ETFs manufacture a lot more than just computer chips. This is a resilient business, but not without volatility.

At the time of writing, Tim Parker did not own any shares in any company mentioned in this article.

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares JPMorgan USD Emerg Markets Bond

    Learn about the iShares JPMorgan USD Emerging Markets Bond fund, which invests in bonds of sovereign and quasi-sovereign entities from emerging markets.
  2. Mutual Funds & ETFs

    ETF Analysis: SPDR Dow Jones International RelEst

    Learn how the SPDR Dow Jones International Real Estate exchange-traded fund (ETF) is managed and for whom the ETF is most appropriate.
  3. Active Trading Fundamentals

    How Hedge Funds Front-Run Index Funds to Profit

    Understand what front running is, and learn how hedge funds use this investing strategy to profit from the anticipated stock buys of index funds.
  4. Mutual Funds & ETFs

    ETF Analysis: Schwab US Large-Cap

    Discover how the Schwab U.S. Large-Cap exchange-traded fund is managed, the index it tracks and the investors for which it is most appropriate.
  5. Mutual Funds & ETFs

    ETN Analysis: Rogers Intl Commodity Energy Total Return

    Learn more about the Rogers International Commodity Total Return, which is an exchange-traded note that tracks a broad index of commodity futures.
  6. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  7. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  8. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  10. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  4. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  5. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  6. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!