Major Tech Companies Increase Semiconductor Spending

In a significant move, Microsoft, Amazon, Alphabet, Meta Platforms, and Oracle plan to invest nearly $700 billion in capital expenditures by 2026, marking an impressive 81% rise from the previous year. A large portion of this investment aims to satisfy the rising demand for semiconductors.

Within this sector, two main exchange-traded funds (ETFs) stand out: the VanEck Semiconductor ETF (SMH) and the iShares Semiconductor ETF (SOXX). Interestingly, the Invesco PHLX Semiconductor ETF (SOXQ) has recently ascended to third place. All three ETFs bear strikingly similar names, but they differ in terms of costs and investment strategies.

The SMH ETF places emphasis on a centralized AI infrastructure role, whereas SOXQ is known for being the more affordable option. On the other hand, the iShares ETF presents a more complex investment case among the trio.

VanEck Semiconductor ETF (SMH)

SMH tracks the MVIS US Listed Semiconductor 25 Index and is weighted by market capitalization without any upper limit on individual stocks. This results in a portfolio that skews toward larger companies. Key holdings include:

1. Nvidia: 15.55%
2. Taiwan Semiconductor Manufacturing: 9.78%
3. Micron Technology: 7.28%
4. Advanced Micro Devices: 7.22%
5. Intel: 6.56%

iShares Semiconductor ETF (SOXX)

SOXX consists of 30 stocks tracked by the ICE Semiconductor Index. It also employs a capped weighting strategy but places more restrictions on individual stock weightings, which benefits small and medium-sized firms. Its top holdings include:

1. Micron: 11.04%
2. Advanced Micro Devices: 9.51%
3. Broadcom: 6.58%
4. Intel: 6.53%
5. Marvell Technology: 6.18%

Invesco PHLX Semiconductor ETF (SOXQ)

SOXQ mirrors SOXX in holding around 30 stocks, tracking the PHLX Semiconductor Sector Index. However, it boasts a lower expense ratio of 0.19%, almost half that of SOXX. Its main assets include:

1. Micron: 11.26%
2. Nvidia: 9.12%
3. Broadcom: 8.39%
4. Intel: 6.67%
5. Advanced Micro Devices: 6.51%

Comparing SMH, SOXX, and SOXQ

The VanEck Semiconductor ETF (SMH) is notably more concentrated at the top but also boasts the best performance among the three, with an average annual return of 36% over the past five years, surpassing SOXX’s average of 31%. Notably, Nvidia and TSMC compose 25% of SMH’s total holdings, making them significant players in capital expenditures.

Conversely, the iShares ETF is designed for a more balanced portfolio, though it faces criticism over its expense ratio of 0.34%, which is on par with SOXQ’s 0.19% rate.

In the end, it’s a duel between SMH and SOXQ.

Despite their varying constructions, these three ETFs are likely to yield similar performances. Which one outperforms can often depend on the megacap stocks at any given time, which ties back to costs.

I tend to lean toward options that offer a wider range at a lower cost. Due to its reduced expense ratios, the Invesco PHLX Semiconductor ETF has slightly edged out the iShares ETF in recent years, which is a trend one might expect.

For these reasons, I would consider the Invesco PHLX Semiconductor ETF as the most promising option. It’s crucial to view these as more of satellite investments rather than core holdings—keeping a reasonable position size is wise. Given the anticipated sales and profit growth alongside capital investment in the upcoming years, this ETF seems set for success.