iShares Semiconductor (SOXX) ETF is beating QQQ: Is it a buy?

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on Mar 10, 2024
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  • The iShares Semiconductor ETF has outperformed the QQQ in the past 12 months.
  • The surge was helped by the likes of Nvidia, Broadcom, and AMD.
  • There is a risk that the ETF has become highly overvalued.

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The iShares Semiconductor ETF (SOXX) has done well in the past few months, helped by the likes of Nvidia, Broadcom, and AMD. The highly popular fund has jumped by more than 65% in the past 12 months, beating the Invesco QQQ, which is up by about 50% in the same period. It has also beaten the SPDR Dow Jones ETF (DIA) and SPDR S&P 500 ETF (SPY).

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Semiconductor companies are booming

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Semiconductor companies have emerged as the best-performing assets in the market this year. Nvidia stock price has gone vertical, giving it a market cap of over $2.3 trillion, making it the third-biggest company in the world.

Super Micro Computer (SMCI) stock price has soared by over 300% in 2024, transforming the company into a $65 billion juggernaut. While Marvell Technologies stock retreated last week, it is still up by 30% this year. 

AMD stock price has jumped by 50% this year, bringing its market cap to over $335 billion. This is a remarkable comeback for a company that was valued at less than $100 billion in 2022. 

Other top-performing companies in the SOXX ETF are Broadcom, Intel, Applied Material, Taiwan Semiconductor, and Lam Research. Most of these companies published strong financial results this year as demand rose.

There are risks for investing in the SOXX ETF. The biggest risk is that most semiconductor companies are severely overvalued compared to their peers. 

For example, estimates are that the iShares Semiconductor ETF has a PE ratio of 50, which is much higher than the broader S&P 500 multiple of 23. 

Nvidia has a forward PE ratio of 36 while AMD has a multiple of 56. Other companies like Intel, Broadcom, and ASML have multiples north of 30. SMCI has a forward PE ratio of 52.35.

Investors justify this performance because of the generational opportunity of investing in artificial intelligence, an industry that is set to shape the world for decades. 

However, the risk is that this growth may not last for a very long time. For example, while demand for data centre chips is rising now, what will happen when the demand wanes in the next few years.

The other risk is that the semiconductor may be heading towards oversupply as countries boost their capabilities. China is investing over $40 billion to boost its domestic capabilities. 

Other countries like those in Europe and US are investing billions in the industry. Last week, the US government gave TSMC $5 billion to support a plant in Arizona. What will happen once all these plants go online?

The other SOXX risk is the supersize exposure to Nvidia, AMD, and Broadcom. Combined, the three companies have over $3.87 billion in the $13 billion fund.

SOXX ETF stock price analysis

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SOXX ETF

SOXX chart by TradingView

The SOXX ETF bottomed at $95.20 in October 2022 as inventory concerns remained. The shares surged and crossed the important resistance point at $181.52, its highest point in January 2022.

They have remained above the 50-week and 25-week moving averages while the MACD and the Percentage Price Oscillator (PPO) have continued their uptrend. 

Therefore, while the bull run may continue, a pullback cannot be ruled out as investors start to take profits. If this happens, the next support to watch will be at $181.52.

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