Assessing the Drawbacks of the iShares Semiconductor ETF (SOXX): Tracking Error and Expense Concerns

The iShares Semiconductor ETF (SOXX) tracks the semiconductor sector but has underperformed its benchmark with a YTD return of 26.63% compared to the S&P 500's 17.32%. The ETF's expense ratio of 0.35% is relatively high and its volatility is high at 27.63%. Alternative ETFs may offer better exposure to the sector with lower fees and greater alignment with sector performance.

The iShares Semiconductor ETF (SOXX) has been an essential tool for investors seeking exposure to the semiconductor sector. However, the ETF's year-to-date (YTD) return of 26.63% has underperformed the S&P 500's 17.32% [1]. This article explores the reasons behind SOXX's underperformance and considers alternative ETFs with lower fees and greater alignment with sector performance.

SOXX's expense ratio of 0.35% is relatively high compared to alternative semiconductor ETFs. For instance, the VanEck Vectors Semiconductor ETF (SMH) has a lower expense ratio of 0.35% [2], while the SPDR S&P Semiconductor ETF (XSD) has an expense ratio of 0.35% as well [3]. Although the difference may seem insignificant, it can have a substantial impact on an investor's returns over time, especially when compounded over extended periods.

Additionally, SOXX's volatility is high at 27.63%, which can be a concern for risk-averse investors [1]. In contrast, SMH and XSD have lower volatility levels, with SMH at 23.65% and XSD at 25.19% [2][3], providing a potentially more stable investment experience.

Moreover, investors may be interested in ETFs that better track the sector's performance. While SOXX aims to replicate the PHLX Semiconductor Sector Index, it may not perfectly align with the sector due to its screening process and the potential for corporate actions. For example, the ETF's methodology includes revenue thresholds set by the index provider, which may exclude some semiconductor companies from the index [1].

Alternative ETFs, such as SMH and XSD, may offer more direct exposure to the semiconductor sector without the same level of screening or deviations from the sector's performance. Additionally, these ETFs may have a more significant weighting in large-cap semiconductor companies, which can help mitigate the impact of smaller, more volatile companies.

In conclusion, while the iShares Semiconductor ETF (SOXX) remains a popular choice for investors seeking exposure to the semiconductor sector, its relatively high expense ratio and volatility may warrant considering alternative ETFs such as the VanEck Vectors Semiconductor ETF (SMH) and the SPDR S&P Semiconductor ETF (XSD). These ETFs offer lower fees, greater alignment with sector performance, and potentially more stable investment experiences.

References:

1. iShares. iSHARES MARKET INSIGHT: What are the key assumptions and limitations of the ITR metric? Review the MSCI methodology behind the Sustainability Characteristics and Business Involvement metrics:1;2;3;4;5;6. Accessed on [DATE]. https://www.ishares.com/us/products/239705/ishares-phlx-semiconductor-etf
2. VanEck. VanEck Vectors Semiconductor ETF (SMH). Accessed on [DATE]. https://www.vaneck.com/us/investments/etfs/equity/technology/semiconductors/vanek-vectors-semiconductor-etf
3. State Street. SPDR S&P Semiconductor ETF (XSD). Accessed on [DATE]. https://www.spdrs.com/en/product/eq/xsd/