My ETF pick of the month is the iShares Semiconductor ETF (SOXX). SOXX is a sector ETF, meaning it’s a diversified portfolio of stocks but only from its sector, the semiconductor sector. Semiconductor companies makes the parts that go into the technology things that run your life (iPhone, iPad, laptop, etc) and that’ll be a part of your life in the future (artificial intelligence, augmented reality, self-driving cars and virtual reality). As tech continues to advance, the semiconductor companies will get a very nice chunk of the money pie that goes along with that technological development. The great part about selecting this sector ETF is that you get to ride the progress of the overall sector instead of trying to choose the winners on an individual company basis from within the sector.
Over 40% of SOXX holdings are in Texas Instruments, Intel, Nvidia, Qualcomm and Broadcom but it holds a total of 32 different companies because diversity is important and is not just an old, old wooden ship. On a return basis, in 2017 SOXX returned just shy of 40% but more than doubled the return of the S&P 500! OMG! And, in the past five years, SOXX has returned an average of over 25% per year! While these rates are both incredible unsustainable in the long run, I have a ton of confidence that the overall sector will outperform the market over the next 20+ years due to semiconductor companies being at the leading edge of technological advancement. The great thing about SOXX is that I don’t have to pick which companies will lead the next technical revolution because they’ll likely be holding with this diversified ETF.
It’s worth noting that because of the success of semiconductor stocks over the past five years, their individual and sector price-to-earnings ratios are significantly higher than the market average. What that means is that during any market sell-off, correction or recession the semiconductor sector will be a prime candidate for profit taking and therefore prone to higher volatility. But, if you can stomach the ups and downs with a long-term mindset and view dips as opportunities to add to your SOXX position, then I believe this ETF can be a great fit within your portfolio. If you’re really into volatility, the semiconductor triple-leveraged ETF (SOXL) returned over 150% this year but it would also decrease by 3x SOXX during periods of profit taking and recession. Personally, I view something like this as a good option to jump into after the correction or recession has taken place…if you want to get into leveraged ETFs at the top of the market (aka now), do so at your own risk.
Before purchasing any stocks or ETFs, you should do your own research and consult a financial professional because, disclaimer, I’m not a paid finance professional. You can research SOXX for free on websites like Seeking Alpha and MarketWatch amongst other free online sources. You can look forward to another stock pick in January!
Happy New Year! ‘Merica!