Is XSD A Better Semiconductor ETF Than SMH?

Summary

• Semiconductor revenues are expected to grow 25% in 2021.
• Semiconductor stocks as an aggregate have grown 40% in 2021.
• SPDR S&P Semiconductor ETF XSD has outperformed SMH for the 1-Year period in 2021.
• Semiconductor manufacturer SiTime is a significant factor in the growth of ETF XSD.
• This idea was discussed in more depth with members of my private investing community, Semiconductor Deep Dive. Learn More »

Jae Young Ju/iStock via Getty Images

The semiconductor industry is exhibiting explosive growth. The Semiconductor Industry Association (SIA) announced worldwide sales of semiconductors totaled $144.8 billion during the third quarter of 2021, an increase of 27.6% over the third quarter of 2020. Hundreds of semiconductor companies are manufacturing chips for thousands of applications, and are segmented into major sectors that include Discretes, Analog, Microprocessors, Microcontrollers, Logic, Memory, DRAM, and NAND.

As shown in Chart 1, each of these sectors has a different market trajectory with different cycles. These factors complicate the decision-making process for individual investors purchasing individual stocks.

Chart 1

Semiconductor equipment stocks have also grown strongly, as I pointed out in a November 30, 2021 Seeking Alpha article entitled “KLA Corporation Tops Semiconductor Equipment Manufacturers In 2021 With 42.6% YoY Growth.”

Chart 2 presents semiconductor and semiconductor equipment MoM billings between 1995 and September 2021, according to The Information Network’s report entitled “Global Semiconductor Equipment: Markets, Market Shares, Market Forecasts.”

During this 25-year period, semiconductor equipment growth (blue line) has trailed semiconductor growth (red line). I’ve also plotted the computer-generated trendlines (dotted lines) for both sectors, and the differences in slopes of the billing trendline is obvious. I must emphasize that these are trendiness for the past 25 years, and investors must not focus on just the past two years.

Thus, on the basis of this analysis, it would appear to the long-term investor that semiconductor stocks are the best bet to buy and hold, versus semiconductor equipment stocks.

Chart 2

One way to simplify investment is through an exchange-traded fund (ETF). Exchange-traded funds combine aspects of mutual funds and conventional stocks. Like a mutual fund, an ETF is a pooled investment fund that offers an investor an interest in a professionally managed, diversified portfolio of investments. But unlike mutual funds, ETF shares trade like stocks on stock exchanges and can be bought or sold throughout the trading day at fluctuating prices.

There are more than 2,000 ETFs in the U.S. and approximately 10 semiconductor ETFs. Three of the leading Semiconductor ETFs are SPDR S&P Semiconductor ETF (NYSEARCA:XSD), iShares Semiconductor ETF (SOXX), and VanEck Semiconductor ETF (SMH), which I address in this article.

A comprehensive analysis of these three ETFs is shown in Table 1. One of the key differentiators is Assets Under Management ("AUM"), which represents the total of all investor dollars invested in all share classes of the fund. Investors generally consider higher investment inflows and higher AUM comparisons as a positive indicator of quality and management experience. That would make the SMH ETF a stronger choice with an AUM of $7.15 billion compared to just $1.53 billion for XSD.

With little to differentiate the two ETFs, I make another comparison vis-a-vis stock performance. Table 2 shows YTD and 1-year performance for the two ETS. There is little to differentiate among the two companies based on YTD stock performance. But for the 1-year period, XSD is up 16% over SMH.

Chart 3 shows YTD stock price for the two ETFs.

Chart 3

Chart 4 shows 1-year stock price for the two ETFs.

Chart 4

Table 3 shows the top 10 holdings for XSD. In addition to eight semiconductor companies on the list, XSD holds two solar companies First Solar (FSLR) and SunPower (SPWR). Based on Seeking Alpha’s Quant rating, FSLR is ranked 45 out of 65 in the semiconductor industry and SPWR is ranked 53. Both have underperformed the overall holdings listed.

Two semiconductor stocks with strong stock growth are Advanced Micro Devices (AMD) and NVIDIA (NVDA). Quant rankings are 23 and 22 respectively. AMD and NVDA are also in the top 10 rankings for SMH.

Xilinx (XLNX) is in the top 10 only on XSD. AMD is moving toward finalizing the acquisition of Xilinx by the end of the year.

Two stocks that stand out for XSD are Synaptics (SYNA) and SiTime Corp. (SITM). These companies had growth of 258% and 201%, respectively.

For Synaptics, much of the company's growth has come from acquisitions - Conexant, Marvell's (MRVL) multimedia solutions business, DisplayLink, and Broadcom's (AVGO) Internet of Things business. The acquisition of DSP Group is expected in 2021. These acquisitions have substantially diversified Synaptics' product portfolio and opened it up to new high growth areas. But growth has been dependent on the growth of the consumer Internet of Things. This has thrust the company into a marketplace filled with strong competition such as Samsung LSI (OTC:SSNLF), STMicroelectronics (STM), Alps Electric (OTCPK:APELY), Himax Technologies (HIMX), Novatek Microelectronics, and SiliconWorks, Broadcom, MediaTek (OTCPK:MDTKF), Cirrus Logic (CRUS), Qualcomm QCOM), NXP (NXPI), and Silicon Labs (SLAB). Mobile and PC sectors for the company have been flat in 2021.

SiTime's solutions are used in various markets, including enterprise and telecommunications. In the last quarter, revenue increased by $30.4 million, or 93%, for the three months ended September 30, 2021 compared to the same period in the prior year. The increase was primarily related to 33% higher volume of shipments year over year and an increase of 45% in average selling price of our products. Competitors include Microchip Technology (MCHP) Murata Manufacturing (OTCPK:MRAAY), Renesas (OTCPK:RNECF), and Texas Instruments (TXN). Apple (AAPL) is responsible for 40%-35% of SiTime's sales.

Table 4 shows the top 10 holdings for SMH. Included in the top holdings are two semiconductor equipment suppliers ASML (ASML) and Applied Materials (AMAT). Stock of both companies has increased above 70% in the past 1-year period, higher than most semiconductor companies.

Investor Takeaway

The two ETFs have exhibited similar performance in the past 1-year and YTD periods. SPDR S&P Semiconductor ETF XSD has a slight edge, as shown above in Table 2 and illustrated in Charts 3 and 4.

Taking a closer look at XSD and based on performance of Synaptics and SiTime listed in Table 3, I plotted the performance for two stocks and XSD for a 3-year period in Chart 5. It illustrates that the performance in XSD is directly related to these two stocks.

Chart 5

Chart 6 shows the % change in price for the same period showing that the growth for Synaptics came primarily as a result of strong performance in the past quarter and on strong guidance.

But SiTime, which has grown 1,420% in the past three years, raises the question as to whether one even needs to invest in XSD and merely hold SiTime.

Chart 6

SiTime is a holding in 37 U.S.-traded ETFs. SITM has around 929.5K shares in the U.S. ETF market.

Table 6 shows that XSD had the largest allocation of SITM with an allocation of 2.68%, and SHM analyzed in this article doesn't have much, if any SITM exposure.

Table 7 shows the top performing ETFs with SITM, and the greatest growth is for XSD, which has the greatest SITM exposure.

My opinion is that investors purchase SITM as a single stock based on strong historic performance and guidance in the past quarter earnings call.

I understand the benefits of the diversity of ETFs and have written several articles on them. Clearly the stronger growth of XSD compared to STM is attributed to SITM, and investor evaluation of a semiconductor EFT should be based on its percentage of allocation of SITM.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.