Semiconductor stocks have been on the rebound this year, and the party may still have long to run. Rather than playing chip makers the same old way, you might consider broadening your approach with two ETFs that each has five-star ratings — — the highest — from Morningstar.
Sylvia Jablonski, CEO of Defiance ETFs, described the strategies of the Defiance Quantum ETF
and the Defiance Next Gen Connectivity ETF
Both have been competitive performers. Both hold semiconductor stocks, but also invest in software, hardware and service providers tied to each theme.
Defiance specializes in thematic ETFs, which can be a tricky business. The firm’s Defiance Digital Revolution ETF
will be liquidated after the close on Feb. 28. Jablonski said NFTZ had “failed to attract assets,” according to a Bloomberg report.
The semiconductor rebound and a different take for the long term
When investors look for an easy way to diversify in the semiconductor industry they often look to the iShares Semiconductor ETF
established in July 2001. It has $6.9 billion in assets and holds the 30 stocks in the PHLX Semiconductor Index
SOXX is also rated five-star by Morningstar.
In 2022, SOXX fell 35%, while the S&P 500
was down 18% (both with dividends reinvested). This year through Feb. 1, SOXX returned 22%, while the S&P 500 returned 7%. Taking all of that in, SOXX was still down 20% from the end of 2021, while QTUM and FIVG were down 18% apiece.
During an interview, Jablonksi suggested investors expand their focus on semiconductors to include other technology companies to take advantage of developing trends.
For example, KPMG has predicted that “automotive semiconductor revenue will reach $200 billion annually by the mid-2030s and surpass $250 billion by 2040.” Those numbers may at first seem very high, but in its 2022 estimates, KBW said an annual revenue range of $200 billion to $250 billion in 2040 would make for a compound annual growth rate ranging from 6.4% to 7.8% from its 2020 baseline.
And KPMG expects wireless communications revenue to increase even more rapidly in the near term.
Both of the ETFs Jablonski discussed hold shares of companies in several industries that support autonomous driving and the 5G wireless network build-out.
When discussing QTUM and FIVG together, Jablonski said: “If semiconductors do well, all these major innovations that benefit from them will move other stocks related to the fields.”
The Defiance Quantum ETF
was established in September 2018. It has $112 million in assets under management and holds 70 stocks involved in the development and implementation of quantum computing and machine learning, as well as related hardware and materials. The portfolio is equal-weighted with “with possible downward adjustments for securities with low liquidity,” according to FactSet. The holdings are reviewed every six months, with weightings rebalanced. The ETF’s annual expenses are 0.40% of assets under management. (For SOXX, the expense ratio is 0.35%.)
QTUM holds semiconductor stocks, such as Synaptics Inc.
Cirrus Logic Inc.
and Nvidia Corp.
but in the world of artificial intelligence, “Microsoft is getting a lot of attention right now” because of its investment in OpenAI, the developer of ChatGPT, Jablonski said. She pointed to International Business Machines Corp.
as “one of the leaders” in cloud computing, which also is developing AI technology.
The Defiance Next Gen Connectivity ETF
was launched in March 2019. It has $749 million in assets and holds 80 stocks of U.S.-listed companies that are “instrumental” in the rollout of 5G networks. The ETF’s expense ratio of 0.30.%.
The stocks held by FIVG are weighted within four tiers, as described by FactSet:
The first tier has a 50% weighting and is made up of companies “predominantly associated with core cellular networking and satellites operating in the C-band wireless spectrum,” according to FactSet. The top 10 holdings include Verizon Communications Inc.
and AT&T Inc.
but they also include three chip makers: NXP Semiconductors NV
Advanced Micro Devices Inc.
and Analog Devices Inc.
The second tier has a 25% and includes companies providing infrastructure support, such as American Tower Corp.
a real-estate investment trust that owns and leases out cell towers.
The third tier has a 15% weighting and “focuses on hardware and software improving the quality of service, and network testing and bandwidth optimization equipment,” according to FactSet.
The fourth tier is weighted 10% and includes companies involved with broadband modems, fiber optic cables and radio technology for connected devices.
FIVG is also reconstituted and rebalanced twice a year.
When asked why QTUM and FIVG hold such large numbers of stocks, rather than attempting to concentrate and attempt higher returns, Jablonski stressed the importance of holding shares of large companies that are contributing to the themes, while also balancing-out exposure. “You want more volatile pure players, which might lead to stellar performance. But you also want to hedge that” with companies that have strong balance sheets, she said.