The iShares Semiconductor ETF (NASDAQ:SOXX) is up a scorching 56.8% over the past year, but this powerful ETF could have plenty more upside ahead.
I am bullish on SOXX based on its strong portfolio of highly rated semiconductors, the semiconductor industry’s long-term growth prospects, its market performance over the long term and the fact that many of its components are less expensive. than might be expected, given their strong performances.
What Is the SOXX ETF Strategy?
SOXX is an index ETF from BlackRock (NYSE:BLK) iShares which, according to BlackRock, give investors “exposure to US companies that design, manufacture and distribute semiconductors.”
Is It Too Late to Invest in Semiconductors?
With SOXX’s impressive gains over the past year and the momentum that semiconductor stocks have had in general, many investors may be wondering if they are too late to invest in the semiconductor sector. The good news is that while the space has grown quite a bit, the entire industry has plenty of runway for growth going forward. Analysts from McKinsey believe that the market could grow by 80% during this decade and reach $1 trillion by 2030.
While the growth of generative AI is probably the most exciting field driving this growth, it is important to remember that other promising areas such as self-driving cars, high-performance computing and the Internet of Things (IoT) will drive additional demand for semiconductors because well.
Properties of SOXX
As a directional bet on US semiconductors, SOXX isn’t particularly diversified, and that’s okay. It holds 30 stocks, and its top 10 holdings account for 60.1% of its portfolio. Below is an overview of the top 10 SOXX holdings using the TipRanks holdings tool.
SOXX has large positions in its major holdings such as Nvidia (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Broadcom (NASDAQ:AVGO). This isn’t necessarily a bad thing, as these stocks are up 239.7%, 121.5% and 113.9% respectively over the past year, helping to drive SOXX’s hot performance.
It’s interesting to note that while these are large positions, SOXX’s exposure to Nvidia is actually quite a bit lower than that of its biggest competitor in the semiconductor ETF space, the VanEck Semiconductor ETF (NASDAQ:SMH), which has a massive 24.7% position in the AI chip leader. This isn’t necessarily a good or bad thing, but it does take some risk off the table for SOXX compared to SMH in case Nvidia stock pulls back.
Beyond these leaders in generating AI chips, I like the fact that SOXX includes stocks from all aspects of the semiconductor value chain, including semiconductor manufacturers and the companies that manufacture the complex equipment and machinery used in the semiconductor manufacturing process, such as Applied Materials (NASDAQ:AMAT), Lam Research (NASDAQ:LRCX), ASML Holding NV (NASDAQ:ASML), and Taiwan Semiconductor (NYSE:TSM).
I like this for a few reasons. First, it adds to SOXX’s diversification by bringing different parts of the semiconductor supply chain to its portfolio.
Second, these are great stocks that have generated outstanding returns for shareholders over the past year. Applied Materials is up 74.5% over the past year, Lam Research is up 89.1%, ASML is up 43.6%, and Taiwan Semiconductor is up 42.8%.
Furthermore, while these stocks have grown, they are not wildly overpriced and offer better value than one might expect at first glance. For example, Taiwan Semiconductor trades at 20.2 times consensus 2024 earnings estimates, while Applied Materials trades at 24.5 times 2024 earnings estimates. While these numbers aren’t cheap, they’re roughly in line with the broader market, which is attractive enough for stocks to do so well.
Lam Research and ASML are slightly more expensive, with Lam Research trading at 31.2 times 2024 earnings estimates and ASML trading at 45.6 times estimates.
Finally, these stocks are collectively viewed very favorably by TipRanks’ Smart Score system. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It gives stocks a score from 1 to 10 based on eight market key factors. A score of 8 or higher is equivalent to an Outperform rating. ASML and Taiwan Semiconductor have “Perfect 10” Smart Scores, Applied Materials has an Outperform-equivalent Smart Score of 9, and Lam Research has a Neutral-equivalent Smart Score of 7.
Looking at the rest of SOXX’s portfolio, an impressive nine of its top 10 holdings have Outperform-equivalent Smart Scores of 8 or higher. Advanced Micro Devices, Broadcom, Marvell Technology (NASDAQ:MRVL), and the aforementioned ASML all feature 10 out of 10 Smart Scores.
The Smart Score system also takes a favorable view of SOXX itself, giving it a super-equivalent ETF Smart Score of 8 out of 10.
Sparkling Long Term Performance
Simply put, SOXX’s long-term performance has blown the doors off the broader market, and it’s not even particularly close. Through January 31, SOXX has posted outstanding annualized returns of 16.0% over the past three years, 31.1% over the past five, and 24.5% over the past 10.
For comparison, on January 31, the Vanguard S&P 500 ETF (NYSEARCA:WOO) returned 11.0% over the last three years, 14.2% over the last five years, and 12.6% over the past decade.
Meanwhile, the tech-centric Nasdaq (NDX), as represented by the Invesco QQQ Trust (NASDAQ:QQQ), returned 20.7% over the last five years and 18.1% over the past 10.
To be clear, it hasn’t always been a smooth ride, as SOXX has experienced a lot of volatility along the way, but the long-term trend is clearly “up and to the right.” For example, SOXX lost 35.1% of its value in 2022 but followed that with a rebound with a 67.1% return in 2023.
What Is SOXX’s Expense Ratio?
SOXX’s expense ratio of 0.35% means that an investor in the fund will pay $35 in fees on a $10,000 investment each year. This is the same expense ratio as other popular ETFs such as the aforementioned SMH and the SPDR S&P Semiconductor ETF (NYSEARCA:XSD) charge, which is probably not a coincidence since these funds are all competitors.
Is SOXX Stock a Buy, According to Analysts?
Turning to Wall Street, SOXX earns a Moderate Buy consensus rating based on 24 Buys, seven Holds and zero Sell ratings assigned in the past three months. The average SOXX stock price target of $666.76 implies 8.5% upside potential.
Investor Takeaway
In conclusion, I am bullish on SOXX based on its market performance over the past decade, its portfolio of high-quality stocks from across the semiconductor value chain, and the semiconductor industry’s long-term growth prospects. While the ETF has been on a tear, it’s not too late to consider investing in SOXX, and there’s room for more upside ahead, as its holdings have strong growth prospects, and many are less expensive than one might expect.
Disclosure
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.