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Deep Dive: These 3 ETFs let you play the hot semiconductor sector, where Nvidia, Micron, AMD and others are growing sales rapidly

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Semiconductor stocks may continue to be an excellent area of the market for investors, even though the prospect of a long period of rising interest rates has put pressure on some high-flying technology stocks.

On Tuesday, investors sent chipmakers’ stocks higher after Taiwan Semiconductor Manufacturing Co. TSM reported double-digit increases in fourth-quarter sales and earnings, and said capital expenditures in 2022 would total between $40 billion and $44 billion.

The reason chipmakers may be one of the best tech-oriented plays: Demand is rising for semiconductors used in vehicles and all sorts of devices.

Below is a screen of 44 stocks held by three exchange traded funds that are focused on the semiconductor industry.

The three funds have varying approaches. First, here are their average annual returns for various periods against those of the SPDR S&P 500 ETF Trust SPY and the Invesco QQQ Trust QQQ, which tracks the Nasdaq-100 Index:

ETF Ticker Average return – 3 years Average return – 5 years Average return – 10 years Average return – 15 years
iShares Semiconductor ETF   SOXX   49.7% 35.4% 27.5% 16.7%
SPDR S&P Semiconductor ETF   XSD 50.1% 32.8% 26.2% 16.5%
VanEck Semiconductor ETF   SMH 50.8% 35.1% 27.0% 18.1%
SPDR S&P 500 ETF Trust   SPY   24.2% 17.8% 16.0% 10.4%
Invesco QQQ Trust   QQQ   25.3% 27.2% 20.4% 15.7%
Source: FactSet

The semiconductor ETFs have outperformed SPY and QQQ by wide margins for all periods. Their performance has been similar, but mixed, with the VanEck Semiconductor ETF SMH taking the prize for the three-year and 15-year periods.

The iShares Semiconductor ETF SOXX has had the best average returns for five years and 10 years. The SPDR S&P Semiconductor ETF XSD ranks second for three years but trails the other two for all other periods on the table.

Here’s more about the semiconductor ETFs:

  • SOXX is the largest, with $9.9 billion in total assets. It holds the 30 stocks in the PHLX Semiconductor Index — the 30 largest U.S. -listed companies (including American depositary receipts for non-U.S. companies) that make computer chips or provide equipment or services used to make them. ADRs are capped at 10% of the portfolio. The ETF is weighted by market capitalization, with limits of 8% for the five largest holdings and 4% for the rest. It is highly concentrated, with the top five stocks (Broadcom Inc. AVGO, Qualcomm Inc. QCOM, Nvidia Corp. NVDA, Intel Corp. INTC and Advanced Micro Devices Inc. AMD ) making up 35% of the portfolio.
  • XSD has $1.6 billion in assets and holds 40 stocks of semiconductor companies of various sizes included in the S&P Total Market Index. The portfolio is equal-weighted and rebalanced quarterly. According to FactSet, the equal weighting “tilts its portfolio away from large, well-known companies and toward smaller growth ones.”
  • SMH has $1.3 billion in assets and holds 25 U.S.-listed stocks or ADRs, selected through a modified cap-weighted methodology that doesn’t put a limit on the percentage of non-U.S. companies in the portfolio. So the largest holding is Taiwan Semiconductor, which makes up 10.5% of the portfolio, while only accounting for 4% of the SOXX portfolio.

There’s something to be said for each of the ETFs’ approaches, and long-term investors looking for the broadest take on the industry might be well-served holding shares of all three.

Now let’s look at forward price-to-earnings ratios based on the consensus estimates for the next 12 months among analysts polled by FactSet, as well as expected compound annual growth rates for sales per share, earnings per share and free cash flow per share through 2023:

Company Ticker Forward P/E Two-year estimated sales CAGR Two-year estimated EPS CAGR Two-year estimated FCF CAGR
iShares Semiconductor ETF SOXX 20.67 10% 11% 15%
SPDR S&P Semiconductor ETF XSD 25.02 11% 19% 23%
VanEck Semiconductor ETF SMH 21.9 11% 12% 15%
SPDR S&P 500 ETF Trust SPY 20.82 6% 9% 12%
Invesco QQQ Trust QQQ 28.29 10% 11% 15%
Source: FactSet

What stands out are the highest P/E valuation for QQQ and the highest expected EPS and free-cash-flow CAGR for XSD through 2023.

XSD is also the most expensive of the three semiconductor ETFs on a forward P/E basis. Then again, it is considerably cheaper than QQQ on this basis and is expected to grow EPS and FCF much more quickly.

Semiconductor stock screen

If we take the three ETF portfolios together, removing duplicates, we’re left with a list of 45 stocks. Consensus estimates for sales per share and earnings per share through calendar 2023 are available for 44 of them. For some, free cash flow estimates aren’t available, and these are marked “N/A.” If a company is expected to report negative earnings for a calendar year, the EPS CAGR will also be marked “N/A.” For more detail on any of the companies, click on the tickers.

The list of 44 semiconductor-industry stocks is sorted by estimated two-year sales CAGR through 2023:

Company Ticker Two-year estimated sales CAGR Two-year estimated EPS CAGR Two-year Estimated FCF CAGR
Wolfspeed Inc. WOLF 36.9% N/A N/A
Marvell Technology Inc. MRVL 26.2% 36.3% 77.7%
Taiwan Semiconductor Manufacturing Co. Ltd. ADR TSM 20.5% 22.2% 52.0%
Analog Devices Inc. ADI 20.5% 14.4% N/A
Universal Display Corp. OLED 20.4% 28.6% 40.1%
SunPower Corp. SPWR 19.6% 75.0% N/A
Monolithic Power Systems Inc. MPWR 19.1% 21.1% 13.7%
Nvidia Corp. NVDA 18.8% 21.2% 37.5%
Micron Technology Inc. MU 16.9% 33.1% 73.1%
Advanced Micro Devices Inc. AMD 16.0% 24.7% 12.9%
Entegris Inc. ENTG 15.5% 16.7% -3.3%
Lattice Semiconductor Corp. LSCC 15.3% 28.7% N/A
Synaptics Inc. SYNA 14.7% 18.7% N/A
Allegro MicroSystems Inc. ALGM 13.5% 21.6% 35.0%
ASML Holding NV ADR ASML 13.1% 18.6% 20.9%
Silicon Laboratories Inc. SLAB 12.6% 32.5% N/A
Smart Global Holdings Inc. SGH 11.9% 11.4% N/A
Synopsys Inc. SNPS 11.6% 14.8% 4.4%
Qualcomm Inc. QCOM 11.6% 13.5% 21.4%
Semtech Corp. SMTC 10.2% 18.6% 18.6%
MaxLinear Inc. MXL 9.8% 12.3% -0.6%
KLA Corp. KLAC 9.8% 12.6% 4.7%
Qorvo Inc. QRVO 9.3% 12.7% 35.4%
NXP Semiconductors NV NXPI 9.3% 11.7% 12.4%
Skyworks Solutions Inc. SWKS 9.1% 10.2% N/A
Applied Materials Inc. AMAT 9.0% 12.6% N/A
STMicroelectronics NV ADR RegS STM 9.0% 15.7% 89.3%
Teradyne Inc. TER 8.6% 11.0% 18.1%
Cadence Design Systems Inc. CDNS 8.5% 10.6% 8.8%
Xilinx Inc. XLNX 8.3% 16.8% N/A
Microchip Technology Inc. MCHP 8.2% 10.8% 11.1%
First Solar Inc. FSLR 8.2% -5.7% N/A
Diodes Inc. DIOD 8.0% 13.4% 76.2%
Broadcom Inc. AVGO 7.8% 12.8% N/A
United Microelectronics Corp. ADR UMC 7.7% 6.2% 20.7%
Lam Research Corp. LRCX 7.7% 11.2% #N/A
Power Integrations Inc. POWI 7.2% 4.7% 1.9%
ASE Technology Holding Co., Ltd. ADR ASX 7.0% 2.8% N/A
Cirrus Logic Inc. CRUS 5.5% 9.3% N/A
Rambus Inc. RMBS 5.5% 7.8% 9.6%
ON Semiconductor Corp. ON 5.3% 11.9% 6.4%
MKS Instruments Inc. MKSI 5.3% 5.0% 9.0%
Texas Instruments Inc. TXN 5.3% 5.0% 6.2%
Intel Corp. INTC 2.1% -15.7% -54.7%
Source: FactSet

Wolfspeed Inc. WOLF is expected by analysts to achieve the most rapid pace for sales growth through 2023. However, it isn’t expected to turn an annual profit until 2023, so the EPS CAGR is marked “N/A.”

Any stock screen is limited, but can help you begin your own research. Click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.

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