We’re currently experiencing a bull market that some of us may never witness again in our lifetime. The developments around artificial intelligence are currently pushing memory and chip stocks to new highs, with companies like Micron (MU) and SK Hynix just hitting the $1 trillion valuation milestone. No matter which memory or chip stock you put your money on, it continues to go up. As good as this sounds, this is exactly the type of market where overcrowded trades can do a lot of damage in a very short amount of time. How does one diversify away from this risk while still keeping the exposure to AI? The answer is deceptively simple: the iShares Semiconductor ETF (SOXX).
Investors are increasingly trying to catch the next big AI stock. It may look easy at first, but being on the wrong side of an AI trade can cost investors dearly, even leaving them unable to continue playing the game. Even opting for an AI ETF could be problematic, for the simple reason that the technology is advancing at a rapid pace, and it is hard to figure out which stocks will be long-term winners. A semiconductor ETF like SOXX, on the other hand, helps diversify away from this risk. By giving exposure to the semiconductor industry, the ETF bets on the infrastructure rather than the companies building applications with AI. By doing so, it ensures it includes the winners, no matter where the AI industry goes.
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iShares Semiconductor ETF Holdings
Here are the top 10 holdings of the SOXX ETF:
| Company | Weight |
| Advanced Micro Devices (AMD) | 8.03% |
| Broadcom (AVGO) | 7.95% |
| Micron Technology (MU) | 7.63% |
| NVIDIA (NVDA) | 6.85% |
| Intel (INTC) | 6.30% |
| Marvell Technology (MRVL) | 6.15% |
| Applied Materials (AMAT) | 4.81% |
| Monolithic Power Systems (MPWR) | 4.30% |
| Texas Instruments (TXN) | 4.03% |
| NXP Semiconductors (NXPI) | 3.93% |
Notice how you still own Nvidia (NVDA), just not at the same concentration as the S&P 500 Index ($SPX) or any major AI-themed ETF. You also own Micron and Advanced Micro Devices (AMD), two stocks that are currently experiencing a massive rally thanks to high CPU and memory demand. Through exposure to Monolithic Power Systems (MPWR), you’re also taking exposure to a company that could potentially solve the biggest bottleneck that AI companies are facing in the long-term: power.
Let’s also not forget that the CHIPS Act, which provides U.S. government support to semiconductor companies, is a huge structural tailwind that an ETF like SOXX is set to benefit from. This governmental support is another reason why an AI-themed ETF carries way more risk than one that bets purely on infrastructure development.
About iShares Semiconductor ETF
The iShares Semiconductor ETF is an exchange-traded fund by BlackRock, which gives exposure across the IT, semiconductor, and semiconductor equipment sectors. Since its inception, the fund has given incredible returns of more than 2,701%. This year alone, the ETF is up over 89.56%.
barchart.comEarnings Impact on iShares Semiconductor ETF
With the earnings reports for most companies already out, the ETF is already pricing in the next quarter’s guidance. Earnings from Intel (INTC), AMD, and Micron have helped spur the already strong rally, but Broadcom (AVGO) is set to announce its earnings report on June 4, and that could put an end to the current rally if it doesn’t turn out well for the company. Wall Street consensus suggests 52% top-line growth, suggesting the rich expectations are mostly priced in.
If the earnings aren’t to the Street’s liking, one can expect a correction in the broader semiconductor sector. Since the bet on SOXX is a bet on the semiconductor infrastructure, it would suffer immensely. On the flipside, a good earnings report wouldn’t give investors any opportunity for a reentry, so timing the ETF could be tricky.
Risks Associated With iShares Semiconductor ETF
As already pointed out, the ETF is heavily dependent on sustained AI demand. This is a concentration risk that investors are taking on while avoiding the stock-picking frenzy that comes with immense risk. Since the bet is on the physical layer of AI, any development that reduces the hardware requirements of the AI buildout will negatively impact the fund.
Additionally, the ETF’s recent rally of over 10% in just the last five trading days comes on the back of gains in stocks like AMD and MU. These stocks are themselves rallying because of increasing option activity, and there could be a sharp reversal at some point in the short term. When that happens, SOXX will also slide, owing to its high exposure to these two. This, too, is a risk that is much smaller than the risk of investing in these two companies individually, making the case for an investment in SOXX stronger. In short, while a high-risk investment in itself,
On the date of publication, Jabran Kundi did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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