Chip maker Broadcom, for example, has acquired 57 smaller rivals during the past two decades—often at significant premiums.
A robust recent period of industry consolidation helps explain why the Invesco fund has outpaced the iShares PHLX Semiconductor ETF (SOXX) on an annualized basis by about 1.5 percentage points during the past five years.
The iShares fund can be seen as a sort of ETF sector proxy. It’s based on a modified market capitalization-weighted index, which gives it a relatively greater emphasis on the industry’s bigger players. Eighty percent of this fund is invested in large-cap companies, compared to 43 percent for the Invesco ETF.
The Invesco fund’s broader focus helps to reduce portfolio concentration. While the iShares fund has roughly 62 percent of its assets invested in its top 10 holdings, that figure drops to 48 percent for the Invesco fund.
Still, in a head-to-head comparison the Invesco fund appears to have its own set of drawbacks. The fund’s 0.61 percent expense ratio is 14 basis points higher than the iShares product. And the Invesco fund’s “dynamic” approach doesn’t appear to add a lot of value over the long haul.
Similar to other so-called dynamic ETFs at Invesco, the firm’s chip fund takes a factor-based approach to portfolio rebalancing. The underlying index selects components based on price momentum, earnings momentum, management action (share buybacks, dividend boosts, etc.) and value.
Has this semi-active approach paid off? The Invesco fund sees sharper drops during periods of sector weakness, and those pronounced dips means the Invesco fund has produced roughly 1.5 percent lower annual returns compared to the SOXX ETF over the past decade.
In short, the Invesco fund appears to be a solid choice if you think the broader “chips-in-everything” theme will drive industry growth in the next few years. But if you are a bit more cautious about industry cycle dynamics, the iShares fund offers smoother returns.
The VanEck Vectors Semiconductor ETF, which has an appealing 0.35 percent expense ratio, is clearly aimed to the industry’s leading players. The fund has nearly two-thirds of its assets in large chip makers, including double-digit weightings in Intel Corp. and Taiwan Semiconductor Manufacturing.
The latter is far and away the world’s largest provider of outsourced chip making. Demand for the firm’s foundry services reflect the demand trends at hundreds of small “fabless” chip makers.
And Taiwan Semiconductor says business conditions are looking good. It recently predicted 2019 sales would grow close to 10 percent as demand for newer chips starts to build.