Semiconductor ETFs Are This Years Technology Titans

The technology sector has been on a roll during the first half of 2014 and semiconductor stocks in particular have been on fire.  The high demand for advanced computing power has led to strong earnings and rocketing share prices for well-known companies such as Intel Corp (INTC) and Micron Technology (MU).

The iShares PHLX Semiconductor ETF (SOXX) is the largest ETF in this industry group that has $460 million invested in 31 U.S.-listed semiconductor companies.  This ETF tracks the PHLX SOX Semiconductor Sector Index, which takes a market cap weighted approach to its portfolio construction.

So far this year, SOXX has gained 19.50 percent versus 7.53 percent for the broader Technology Select Sector SPDR (XLK).

This outperformance can be attributed to investors shying away from social media and internet stocks in favor of more steadfast technology businesses.  This rotation from high beta growth companies to more value-centric areas may also be fueled by the dependable revenue models of semiconductor companies.  

In addition, stocks such as Intel and Texas Instruments (TXN) pay a healthy dividend yield that is an attractive component to investors in the late stages of a bull market.  

The SPDR S&P Semiconductor ETF (XSD) is another innovative ETF that is constructed of 50 stocks in this group with an equal weighted asset allocation.  This allows smaller companies to have a much bigger impact on the total performance of the ETF instead of market cap giants getting most of the attention.

So far this year, XSD has gained nearly 26 percent as a result of this balanced approach and just recently hit a new all-time high this week.  Clearly the appetite for this industry is showing no signs of slowing down any time soon.

It’s also worth noting the MarketVectors Semiconductor ETF (SMH) as another ETF option that closely resembles the makeup of SOXX.  One primary differentiator between these two ETF is SMH has a lower expense ratio of just 0.35 percent versus 0.47 percent for SOXX.  

These semiconductor ETFs have been the brightest industry group of the technology sector so far this year and may prove to have more upside in store if the equity rally continues.