The Philadelphia Semiconductor Index ($SOX) is captured via the popular Semiconductor Ishares ETF (SOXX) — and it just hit a major milestone.
The Philly Semi Index recently crossed the 10,000 mark for the first time. That’s a milestone for sure. But at the same time, the underlying stocks in SOXX have an internal rift. Some semiconductor stocks have gone parabolic, while others are much flatter.
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The Left SOXX Doesn’t Match the Right One
While the headline returns for semis look like a vertical line, the individual components are operating in two completely different universes.
If you are considering adding this exchange-traded fund (ETF) to your portfolio, you are essentially buying a concentrated bet on a few hyper-performers while simultaneously carrying a heavy load of industry laggards. You know, like a lot of today’s U.S. stock market.
Just look at those gaudy trailing returns below. While the three-year and five-year returns indicate a two-year flat period in between, a 200% gain in either time frame is phenomenal. Even if it is narrowly based and has left SOXX’s portfolio selling at 69x earnings.
This $37 billion ETF is topped by some of the glamour stocks of this decade. The 10 largest make up about 60% of assets.
But check this out below. I cannot recall ever seeing this type of disparity in returns between any two pairs of stocks in the same industry. In the same ETF? Of course. But not among alleged peers. What the heck is going on here?
A Semi-Positive Story?
These aren’t just speculative spikes in a few stocks. The winners are driven by the unrelenting demand for memory and processing power. Why? For the same reason anything in today’s stock market is assigned massive value and street cred. It is what is required to build out the global artificial intelligence (AI) infrastructure. AI stocks like these are functioning as an entirely separate asset class. As I’ve noted here recently, this prompts strong consideration when building ETF portfolios.
But while AI names are soaring, traditional, industrially focused semiconductor companies are telling a much more sober story. Several of SOXX’s 35 members, those that cater to the automotive and industrial sectors, are still working through excess inventory. And it creates stock price stagnation.
