Since the start of the pandemic, there have been a number of supply chain and global shortages of different products. But one industry had a shortage of their product not only because of the pandemic-related supply chain problems but because of the rapid increase in demand for the product. More so, the product is seeing demand increases in not just one or two industries in which it serves. Still, nearly every single industry and these products are such items that you and I use literally countless times every single day.
Have you figured out the industry that I am talking about is semiconductors?
The global chip shortage has affected more than just computer sales, but vehicle sales, kitchen appliances, and much more due to a number of different factors that all hit the industry with demand, much around the same time. For example, the auto industry began increasing demand for chips due to more smart driving vehicles and even driverless technologies being options in new cars hitting the market. Kitchen appliances are also demanding more chips due to the "internet of things" movement, which now has nearly every device and appliance in our homes connected to the internet. We now not only have smartphones but smart refrigerators and ovens.
We also saw a boom in the crypto-currency industry since the start of the pandemic, and the mining of crypto-currency uses very high-powered and precise chips. More pressure hit the semis. The gaming industry also saw an increase since the start of the pandemic, especially when 'stay at home' orders were put into effect around the world. And of course, all the new technology that is allowing more and more people to work from home all need more chips to help people become just as productive from home as they were while in the office.
These are just some of the examples of why the semiconductor industry saw demand rising since the start of the pandemic. But not that the demand has risen; it is hard to see why it would weaken anytime in the near future, as in the next few years. It's unlikely that people in mass will go back to work full time in an office. It's unlikely that crypto mining will see a massive down-tick, especially if prices remain elevated. It's unlikely that drivers will NOT want self-driving features in the future. I don't really see why someone wouldn't want their refrigerator or oven to be able to warn them that the oven was left on or the refrigerator isn't cooling. And of course, I don't see anyone saying they want their smartphone or laptop computer to run slower and be larger.
Even if a few of the reasons why semiconductor demand has recently increased doesn't continue to be elevated, the industry will still likely see year over year demand rising for at least the next few years, if not the next few decades. And with that thinking, now seems like just as good of a time as any to invest in the industry. Let's take a look at a few Exchanges Traded Funds that will give you access to the semiconductors and potentially years of growth.
The first is the iShares Semiconductor ETF (SOXX). This is the largest semiconductor ETF by assets under management, with currently $9.87 billion. SOXX tracks a cap-weighted index of the 30 largest US-listed semiconductor companies. The fund has an expense ratio of 0.43% and currently has 32 positions. The fund was started way back in 2001 and has a 10-year annualized return of 28.87%. The fund rose 48% over the last year and 7.29% in December 2021 alone. The fund's top 10 holdings represent 56% of the fund. This is a very, very good option for someone who wants straightforward exposure to the industry.
The next option is the VanEck Semiconductor ETF (SMH). This fund is very similar to SOXX but is slightly smaller in assets and holdings size. It has 25 stocks it tracks and currently just $7.25 billion in assets. The fund also has a slightly lower expense ratio of 0.35%, but very similar performance over the last 1-, 5- and 10-year periods.
If you want to use a little leverage, you don't have many options that focus solely on the semiconductor industry other than the Direxion Daily Semiconductor Bull 3X Shares (SOXL) and the Direxion Daily Semiconductor Bear 3X Shares (SOXS). Both funds track's a very similar index of 30 stocks as the SOXX, but the SOXL is three times long while the SOXS is three times short. So theoretically, if the SOXX went up 5% and you owned the SOXL, you would be up 15%. The SOXS would be down 15% in that scenario, but the opposite would be true if the semiconductor industry fell and you owned the SOXS, which was short the sector. Using leveraged products does increase your risk and should not be used over long periods because the methods used to gain the leverage will actually eat away at profits. However, they are options to investors and could be used during short periods.
The past few years have been interesting for several reasons, but I think the leaps and bounds we have taken from a technology standpoint may be the most impressive change we have seen. And those advancements are all driven by chips and the semiconductor industry, a trend I don't see slowing anytime soon, which is why I am already investing in individual equities in this industry and will soon be investing on the ETF side.
Matt Thalman
INO.com Contributor - ETFs
Follow me on Twitter @mthalman5513
Disclosure: This contributor did not hold a position in any investment mentioned above at the time this blog post was published. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.
