ETF Comparison: SOXX vs SOXQ

The SOXX (iShares Semiconductor ETF) and SOXQ (Invesco PHLX Semiconductor ETF) are two well-known semiconductor-focused ETFs. Trying to figure out what the difference is between the two or which is better – SOXX or SOXQ? I took a detailed look at both and came to the conclusion: they’re very close, but with some technical differences.

I dive into the details in greater detail below, but two key points stand out:

• There are 25 common holdings between the two funds and these holdings account for around 95% of the weight in the two funds.
• SOXX is a much larger fund and has significantly higher trading liquidity, which more than offset’s SOXQ’s slightly lower fee.

Can the balance of the 5% in holdings make all the difference? And how much of a difference in size and liquidity is there? If you’re curious, please continue reading!

Please note that the analysis is based on the holdings as of Q4 2022.

Mandate and Underlying Index

SOXX tracks the investment results of the ICE Semiconductor Index, which measures the performance of the equity securities of the 30 largest US-listed companies. Note that “US-listed” is different from “US-based”. Many foreign-based companies are listed on US stock exchanges, so you could still end up owning international companies in this case.

SOXX used to track the Philadelphia Semiconductor Index however they have switched over to tracking the ICE Semi index in 2022.

SOXQ is a relatively new fund to the ETF world. It started trading on the market in mid-2021. SOXQ tracks the Philadelphia Stock Exchange (PHLX) Semiconductor Sector Index. The Index is designed to measure the performance of the 30 largest U.S.-listed securities of companies engaged in the semiconductor business. The index was originally created in 1993 and is market-cap weighted, like many of the major indices.

If the SOXX had not changed over to the ICE semiconductor index in 2022, both the SOXX and the SOXQ would have been identical.

Companies classified within the semiconductors industry include companies that either manufacture semiconductors to be used in electronic applications or utilize LED and OLED display technology. The semiconductor industry also includes companies that provide services or equipment associated with semiconductor design and manufacturing.

Holdings

Top 10 Holdings

As both underlying indices hold 30 stocks, the total number of holdings in both funds are the same. There is a slight difference in the weights however. The top 10-holdings for the two funds and their cumulative weight is presented in the table below:

As you can see, there is a strong overlap between the holdings, although the weightings for the individual names are different. In fact the first 5 names are exactly the same! We start seeing some differences once we are down in to holdings 6 to 10, but even then three out of those five are the same.

Unique Holdings

As I mentioned earlier, there are 25 names that overlap between the two funds. As both the SOXX and SOXQ can hold 30 companies, that means each fund has 3 unique names. Let’s take a look at what these unique holdings are in each:

Both funds have between 4% and 5% weight in unique names. The only positions of really meaningful difference are Global Foundries and ST Microelectronics.

Global Foundries consists of the foundry business that was spun off by AMD, the maker of processors that compete with Intel. The computer chip fabrication company was privately owned for a number of years and finally relisted on the US markets back in 2021. Although it’s a foundry business, it is not in the same leagues as TSMC, Intel, or Samsung Electronics. The technical and financial challenge of keeping up with the latest fabrication processes was simply too difficult and they rightly took the decision to stay at the older/larger nodes. There’s a lot of demand for those bigger nodes (12nm+) so might as well make some money the relatively easy way!

ST Microelectronics is a designer and manufacturer of a range of analog, mixed signal, MEMS, and power electronics. If you own a Tesla, you’ll find quite a bit of STM’s power electronics in there which helps to charge the battery and also provide the power to the motors. STM’s closest peers would be an Infineon or NXPI; although there would be overlaps with others like Analog Devices or Texas Instruments.

Geographic Allocation

The geographic breakdown of the funds is very close as both have a very strong weighting of around 90-92% in the US. The balance is equally spread between the two expected regions – Netherlands (ASML) and Taiwan (TSMC).

It’s important to remember that the semiconductor industry is unique because although it is globalized, it is also highly integrated. The production chain for semiconductors stretches over many countries: An Intel chip might be designed in India and manufactured in the US! Similarly, an nVidia chip might be designed in the US and manufactured in Taiwan or South Korea. The suppliers for these fabs might be based in the Netherlands, the US, and Japan.

For these reasons, the country exposure is not as relevant in this case as it might be in other sectors. Chip stocks typically rise and fall based on the outlook for the end demand for semiconductors (on a global basis), the supply situation for these chips, and competitive dynamics.

Performance

Invesco’s SOXQ is a relatively new fund so it does not have a multi-year track record in comparison to the iShares SOXX. However as the SOXQ is an ETF, we can use its underlying index (PHLX Semiconductor Index) as a proxy for what the fund would have done. The table below shows the returns for both funds. The greyed cells with italics font indicate returns for the benchmark.

Naturally, given that SOXX used to track the PHLX index until mid-2022, and even now considering that both funds are pretty identical, it’s natural to expect that the returns profile will be virtually the same.

Looking at the historical performance chart, we can see it is basically identical.

Expense Ratios

The final point of difference between the two funds comes down to their expense ratios: SOXX charges 0.40% vs 0.19% for the SOXQ. I would not really worry about a 0.21% difference in the expense ratios between the two funds.

For each $1,000 invested in the funds, you’d be pay $2 higher in fees for the SOXX. The ETF price volatility is higher than that and you’re more likely to make or lose more than that based on what time of day you trade these funds.

If however you are investing in the multiple-thousands of dollars and plan on buying-and-holding for a very long time, you would be better off with SOXQ.

Fund Size & Liquidity

There’s a big difference between the two fund’s sizes though. As of October, SOXX has around $6 billion in assets and the SOXQ has a relatively tiny $58 million.

The big difference is in the trading liquidity of the shares – SOXX’s average trading volumes (984k traded daily) is 20x that of SOXQ (49k traded daily). However as SOXX has a higher trading price, the average daily traded volume (using price as of pixel time) of $342 million compared to the $1 million for the SOXQ. That’s a massive difference!

For that reason if you are investing anything over $100k in the SOXQ, you are going to have thing twice. At this point you’re likely better off in the SOXX or even SMH.

Looking Ahead

In investing, the future matters much more than the past. We’ve had a big market correction in 2022, so now it’s important to understand what can happen in the future. There are two ways to think about this question: 1) What will lead to SOXX or SOXQ performance diverging in the future? 2) What is the outlook for semiconductor stocks in general?

Potential Sources for Divergence in Performance

Looking ahead, it’s honestly difficult to come up with any fundamental reasons why there will be any meaningful divergence in performance. The only factor in my mind at the moment is a technical one: SOXQ’s small fund size and the lack of liquidity. If Invesco continues to struggle with a small fund size, it’s possible that at some point they may pull the plug on the ETF as a purely business decision as their ultra low fee may not be profitable.

If you want absolute certainty around the long term viability of the ETF, then again you’re likely better off with SOXX or SMH.

Outlook for Semiconductor Stocks

It’s always difficult to make short-term or even medium-term predictions on the direction of the market, so I will refrain from doing that here. What I will say however, for the reasons outlined in the section below, is that the long-term outlook for the semiconductor industry is solid.

There are very few industries that consistently grow at this pace and therefore it makes sense for investors to have solid exposure to this industry. And especially now, when the market is in a correction, you can buy this sector at a very nice discount to its fair value!

Which ETF is better SOXX or SOXQ?

There’s a great deal of similarity between both ETFs as there’s a 95% overlap (by weight) in terms of the holdings. The big differences come down to the technical factors: SOXQ has only $58M in assets compared to SOXX’s $6B. SOXQ also has lower trading liquidity. The only benefit is that SOXQ has a slightly lower fee (difference of 0.21%). For a long-term buy-and-hold investor, I would recommend the SOXX as it provides the same performance but with greater liquidity.

Why Invest in the Semiconductor Industry?

What are Semiconductors?

Semiconductors are materials that have been specifically designed to be used in electronic devices and circuits. They are made of materials like carbon, silicon, germanium, and silicon-germanium, which have been carefully processed to create materials with unique electrical properties. The materials are used in electronic devices to create rectifiers, transistors, and diodes, which form the most basic element of electronic circuitry.

As the name implies, semiconductors – sometimes conduct (or carry) electricity and sometimes they don’t. This effectively allows them to operate as a switch in digital circuits – which allows them to generate the 1’s and 0’s that we associate with digital devices.

The various basic elements (typically a transistor) is what forms the basis of the modern chips or integrated circuits (ICs). Integrated circuits are the heart of modern electronics, and without them, we would not have the amazing computing power that we do today. In common terms, we often refer to ICs as computer chips. Semiconductors are an essential component of electronic devices like computers, cell phones, and solar panels. Without them, these devices would not function.

Why are Semiconductors Important?

It goes without saying that the world without electronics and digital products would look very different. Digital devices and products are present in almost every single device today, and this continues unabated. Even toasters now connect to WiFi – and they need multiple chips too!

Even within devices, the complexity rises as the functionality of each device continues to grow. Today’s smartphones are just as powerful as computers from less than 5 years ago. Computer chips, with increasing amounts of processing power, continue to cram in more and more transistors.

Without the increasing complexity and pervasiveness of semiconductors, it would not be possible to have the level of functionality today that we take for granted. Trends such as artificial intelligence, robotics, 5G, internet of things, autonomous driving, mobile communication, etc. will continue to demand an increasing amount of digital

And ultimately, these technological trends are not just fads, they are important life-saving and productivity-improving tools. Consider some example:

• MRI scanners with built-in AI can help a radiologist dramatically improve the speed and quality of diagnosis.
• Robots can perform dangerous tasks which might be unsafe for humans. Alternatively, they can simply help fill in a labour gap, especially in developed nations.
• Autonomous driving and driver assistance features can help reduce the frequency and severity of vehicle accidents.
• Smartphones and the internet have helped increase accessibility to information, allowing a democratized creator based economy!

The list is endless, and I think mostly everyone is familiar with the positive ramifications of technology!

Growth Rate in the Semiconductor Industry

As this slide from ASML shows, the market size of the semiconductor industry is growing dramatically in just the space of this decade. By 2030, the market size of the industry is expected to be three times what it was in 2020! On a combined basis, sales of the semiconductor industry are expected to exceed $1 trillion by 2030.

Typically I am skeptical of such rosy projections, but given the increasing trends towards digitization, I am willing to go along with some of these figures.

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