iShares PHLX Semiconductor ETF (SOXX) is up 44% this year. During the past 3-year and 5-year periods, it has returned 27% and 24%, respectively on an annualized basis. How is iShares PHLX Semiconductor ETF positioned for the future? What is the outlook for the SOXX ETF? Is SOXX a buy, sell or hold?
The semiconductor industry is highly cyclical.
When end markets are booming, semiconductor chip makers have trouble keeping up with demand.
However, chip prices fall if the supply of semiconductor chips exceeds demand.
The demand for semiconductor chips has been declining for some time.
Data from the Semiconductor Industry Association show monthly sales of semiconductor chips worldwide peaked in October 2018 at $42 billion.
Sales appear to have stabilized after falling to $32 billion in April 2019.
Since then, global semiconductor sales have ranged between $32 billion and $34 billion per month.
How is the $2.0 billion iShares PHLX Semiconductor ETF faring in this milieu and positioned for the future?
iShares PHLX Semiconductor ETF Performance
iShares PHLX Semiconductor ETF has posted impressive historical returns and outperformed the S&P 500.
As of October 25, 2019, the ETF has delivered a compound annual return of 27% and 24% for the 3-year and 5-year periods, respectively.
However, the ride has been bumpy.
The SOXX ETF followed the steep decline in semiconductor chipmaker shares in the fourth quarter of 2018 and lost 14%.
The ETF has recouped all these losses in 2019 and tacked on some gains.
As of October 25, the SOXX ETF is up 44% for the year.
Semiconductor shares have bucked the year-over-year decline on worldwide semiconductor sales in 2019. They have rallied on the premise that semiconductor sales are bottoming and set to grow again.
Trade negotiations between the U. S. and China have also contributed to the volatility of the SOXX ETF.
In May alone, the ETF lost 17% when U. S.-China talks stalled.
Semiconductor shares have risen in recent weeks on optimism over the U. S. and China agreeing to the first phase of a trade deal.
This has helped the SOXX ETF recently to rise to a new all-time high.
iShares PHLX Semiconductor ETF Holdings
iShares PHLX Semiconductor ETF divides its assets mainly between semiconductor chipmakers and semiconductor capital equipment manufacturers.
As of October 24, 2019, the SOXX ETF had invested 79% of its assets in semiconductor chipmakers. The remaining 21% were invested in semiconductor capital equipment manufacturers.
Its top five holdings are specialty chipmaker NVIDIA, broad-line semiconductor chip makers Intel, Broadcom, and Texas Instruments, and communication chipmaker Qualcomm. Semiconductor capital equipment manufacturers Lam Research, Applied Materials, and KLA Corporation are included among its top 10 holdings.
iShares PHLX Semiconductor ETF Expense Ratio
iShares PHLX Semiconductor ETF carries an expense ratio of 0.46%. This is just around the mid-point of competing semiconductor ETFs. The expense ratio for such ETFs ranges between 0.35% and 0.60%.
SPDR S&P Semiconductor (XSD) and VanEck Vectors Semiconductor ETF (SMH) carry a 0.35% expense ratio while Invesco Dynamic Semiconductors ETF (PSI) and First Trust Nasdaq Semiconductor ETF (FTXL) charge nearly 0.6% each.
What is ahead for the SOXX ETF?
The information technology revolution that is driving demand for semiconductor chips still has a long way to go. The next generation of wireless network infrastructure or 5G is expected to enhance the capabilities of emerging technologies such as cloud computing, artificial intelligence, the Internet of Things, and virtual reality.
Semiconductor chips play a critical role in enabling users of communication, entertainment, computation, and data storage products and analysis tools to experience the benefits of such emerging technologies.
Semiconductor companies and iShares PHLX Semiconductor ETF, in turn, stand to benefit as 5G wireless networking along with cloud computing, artificial intelligence, Internet of Things, and virtual reality drive demand for semiconductor chips.
Supporting this thesis, industry experts at PwC expect global semiconductor industry sales to recover in 2020 after a relatively weak 2019. They expect global sales to approach the $575 billion mark in 2023 from $480 billion in 2018.
Is the SOXX ETF a Buy, Sell or Hold?
Investors who own iShares PHLX Semiconductor ETF can continue to hold them. The SOXX ETF is also a worthwhile idea for short-term traders to consider.
Long-term investors looking for targeted semiconductor industry exposure are likely to be better off waiting for iShares PHLX Semiconductor ETF to pull-back from its all-time high and create a buying opportunity.