Semiconductors continue to be indispensable in mobile phones, games, cars, military weapons, and even home appliances. Also, cloud computing is increasing the number of devices needed to access the cloud.

The semiconductor industry is also experiencing growth due to an expanding global economy and rapid technological advances. With the increase in the usage of devices, larger amounts of data need to be processed at a faster rate than ever before. The semiconductor industry is in the center of the world's technological advancements.

For those looking to invest in this rapidly growing segment, we'll explore exchange-traded funds (ETFs) that invest in semiconductor stocks. Some of the funds are leveraged exchange-traded funds, which use various financial instruments or debt to magnify the rate of return on investment. Leveraged ETFs can help short-term investors to take advantage of price increases, but leverage can also magnify the losses on a trade. For example, if the fund is leveraged three times, it should theoretically return triple the performance of the benchmark index that it tracks.

It is important to differentiate between how the semiconductor industry is doing and how any particular semiconductor ETF is performing. We chose the top five semiconductor exchange-traded funds based on long-term performance. Also, the management of a fund is important. The money managers of the five ETFs listed below have produced strong results.

Key Takeaways

  • Semiconductors as an industry group contains manufacturers of microchip-related products, including games, cars, and even home appliances.
  • Due to the economic significance of semiconductor development, these ETFs serve as a strong indicator of how the economy is doing.
  • Though semiconductors continue to be an integral part of modern life, no semiconductor fund is bulletproof.

1. Direxion Daily Semiconductor Bull 3X ETF (SOXL)

The Direxion Daily Semiconductor Bull 3X ETF (SOXL) is a leveraged ETF that attempts to provide three times the exposure to the PHLX Semiconductor Sector Index before all fees and expenses. The index tracks the performance of companies that are involved in the design, distribution, manufacture, and sale of semiconductors. The leverage makes the SOXL a riskier ETF, but the leverage can also magnify the returns.  

  • Avg. Volume: 611,287
  • Net Assets: $617 million
  • 1-year Return: 7.48%
  • 3-year Return: 454%
  • Expense Ratio (net): 1.02%

2. ProShares Ultra Semiconductors (USD)

The ProShares Ultra Semiconductors (USD) leveraged ETF seeks to beat the Dow Jones U.S. Semiconductors Index by 200%. It is a high-risk, high-rewards play best for investors who are short-term bullish on the sector and the market. The index tracks the performance of large U.S. semiconductor companies.

The ETF's most heavily weighted stocks are Intel Corp. and NVIDIA Corp., which comprise 23% of the holdings. The average daily trading volume is lower than the other ETFs listed here. As a result, liquidity could be an issue, meaning it may be difficult to execute trades due to a thin market.

  • Avg. Volume: 22,000
  • Net Assets: $55 million
  • 1-year Return: 11.20%
  • 3-year Return: 215.50%
  • Expense Ratio (net): 0.95%

$65 billion

The amount that the U.S. semiconductor industry contributes to the U.S. economy, more than any other U.S. manufacturing industry.

3. Invesco Dynamic Semiconductors Portfolio (PSI)

This ETF attempts to balance growth and risk as it mimics the Dynamic Semiconductors Intellidex Index. The money managers also consider risk factors and whether a stock is undervalued or overvalued. The PSI is comprised of 30 semiconductor companies with a weighting that leans toward small-growth stocks. 

  • Avg. Volume: 52,000
  • Net Assets: $220 million
  • 1-year Return: -3.20%
  • 3-year Return: 98%
  • Expense Ratio (net): 0.61%

4. VanEck Vectors Semiconductor ETF (SMH)

This ETF uses the MVIS US Listed Semiconductor 25 Index as a benchmark. It invests in both stocks and depositary receipts, though it maintains at least 80% of its assets in stocks that are in the index. Foreign companies are included, but U.S. firms dominate the portfolio. Three holdings make up approximately 30% of the fund with Taiwan Semiconductor Manufacturing Corp., Intel Corp., and NVIDIA Corp. Each of the remaining holdings has no more than 5.25% weighting.

  • Avg. Volume: 2,201,000
  • Net Assets: $1.05 billion
  • 1-year Return: 3.86%
  • 3-year Return: 92.50%
  • Expense Ratio (net): 0.35%

5. iShares PHLX Semiconductor (SOXX)

SOXX does not allow any single security to have a weight of more than 8% of the portfolio. This weighting restriction means SOXX must search beyond U.S. firms to foreign firms that are listed on U.S. stock exchanges. The result is that SOXX has many smaller companies to complement the large U.S. companies in the portfolio, which makes the SOXX broader and more diverse than the typical semiconductor ETF.

  • Avg. Volume: 700,000
  • Net Assets: $1.5 billion
  • 1-year Return: 7.07%
  • 3-year Return: 105%
  • Expense Ratio (net): 0.47%

The Bottom Line

The semiconductor sector has performed well over the last five years, and expenses are reasonable, making these ETFs better long-term plays. Overall, it is reasonable to make semiconductor ETFs part of a diversified investment portfolio, but it is vital to perform due diligence and make sure an ETF’s investment goals match the investor’s risk tolerance and time horizon for investing.