SOXX: iShares PHLX Semiconductor ETF

SOXX: iShares PHLX Semiconductor ETF

The iShares PHLX Semiconductor ETF (Nasdaq: SOXX) is a fund that seeks to track the results of an index component that contains U.S. stocks in the semiconductor sector. The index is based on a modified weighted index that caps the maximum weighting for a holding around 8%.

The fund began trading in July of 2001. The fund is up around 3% since its inception, while up a strong 17% in the last five years. The fund only has holdings whose primary business is the design, distribution, manufacture and sale of semiconductors. Further, only equities listed on the NYSE and the Nasdaq are included in the index. The fund pays a reasonable annual dividend of 1.47%.

The semiconductor sector is notoriously volatile. Chip makers are often known to go through boom or bust cycles based upon demand for chips. Demand for electronic devices, including smartphones, will only continue to grow, but the sector's volatility may be difficult for some investors to weather in the long term.

The fund has an average daily volume of around 485,000. This is a reasonable amount of liquidity for an investor who wants to enter or exit a position in the company. The average price-to-equity (P/E) ratio of companies in the index is around 20.6. The average price-to-book (P/B) ratio is 3.36. The fund has around $483 million in assets under management.

SOXX has 30 holdings as of July 2015. The top 10 holdings comprise over 57% of the fund's portfolio. The largest holding is Qualcomm, Inc. with a weighting of 8.46%, followed by Texas Instruments with a weighting of 8.42%. The third-largest holding is Intel Corp. with a weighting of 7.84%. The fund avoids being heavily weighted towards Intel with its modified market-cap index rules. Intel has a massive market capitalization of $137 billion, versus Texas Instruments with a market cap of only $51 billion. The index contains small-, mid- and large-cap companies.

Characteristics

SOXX is managed by BlackRock Fund Advisors. It follows a passive investment strategy, since it is only attempting to replicate the performance of the benchmark index. The fund has a low expense ratio of 0.47%, which reflects the infrequent turnover in the fund’s holdings. The fund rebalances its holdings annually in September. Shares in the fund are available on the Nasdaq exchange. Some brokers may offer shares for purchase without charging commissions.

Suitability and Recommendations

Investing in SOXX is a good way to obtain exposure to the semiconductor sector. However, there is a significant amount of risk with this particular sector. The equity beta for SOXX is around 1.7. This shows the fund has greater volatility versus the overall market. In addition, the fund has a three year standard deviation of around 15.6%. This is a fairly high standard deviation. With only 30 holdings, there is a possibility that the fund would be hit hard by any headwinds specific to the overall market or the semiconductor sector in particular.

Still, the modified market cap prevents the fund from merely tracking the performance of Intel. By including small- and medium-cap companies in the index, there is a possibility that there is a high growth company or a company that may be acquired by a larger competitor. This allows for a great deal of potential upside.

SOXX is geared towards a high growth portfolio. With regard to modern portfolio theory (MPT), the fund has a high risk/reward payoff potential. An investor who buys shares in the fund should also include other investments that do not have a high degree of correlation to ensure sufficient diversification. By including assets that are not correlated, investors can minimize the risk of drawdowns for a portfolio.