🧩 Semiconductor ETFs

Semiconductors have become one of the most important sectors in the market, driven by AI, cloud computing, EVs, and the digitization of everything. But not all semiconductor ETFs are created equal. The difference between SMH, SOXX, and XSD can mean dramatically different exposure — and dramatically different returns.

The Big Three: SMH vs SOXX vs XSD

These are the core semiconductor ETFs that most traders use. Understanding their differences is essential.

SMH — The Mega-Cap Play

SMH is market-cap weighted, which means the largest companies dominate. This creates significant concentration:

• Top 10 holdings: ~65-70% of the fund
• NVIDIA alone: Often 15-20%+ of the fund
• Taiwan Semiconductor (TSM): Major holding (foreign exposure)

When to use SMH:

• You want maximum exposure to AI/mega-cap chip leaders
• You believe NVIDIA, Broadcom, and TSM will continue leading
• You want the most liquid semiconductor ETF

The risk: If NVIDIA stumbles, SMH feels it disproportionately.

SOXX — The Balanced Approach

SOXX uses a modified cap-weighted methodology with individual position caps (~8-10% max). This prevents any single stock from dominating:

• Top 10 holdings: ~50-55% of the fund
• More diversified than SMH within large-caps
• US-focused: Less foreign exposure than SMH

When to use SOXX:

• You want large-cap semiconductor exposure with less concentration
• You’re concerned about single-stock risk
• You prefer US-domiciled companies

XSD — The Equal-Weight Alternative

XSD is equal-weighted, giving every holding roughly the same weight regardless of market cap. This creates a fundamentally different exposure:

• Small/mid-cap tilt: Smaller companies have equal voice
• Higher beta: More volatile than SMH or SOXX
• Less NVIDIA-dependent: Mega-caps don’t dominate

When to use XSD:

• You believe small/mid-cap semis will outperform
• You want higher beta exposure to the sector
• You’re looking for mean-reversion after mega-cap outperformance

Comparing the Three

The XSD/SMH Ratio — A Key Signal

The ratio of XSD to SMH tells you whether small-caps are leading or lagging the semiconductor sector:

• XSD/SMH rising: Small/mid-cap semis outperforming — breadth expanding, risk-on
• XSD/SMH falling: Mega-caps leading — narrow leadership, flight to quality

This ratio often inflects at cycle turns. When mega-caps have dominated for extended periods, watch for XSD/SMH to bottom and turn up — it can signal broadening participation.

Alternative Semiconductor ETFs

Beyond the big three, several alternatives offer different approaches:

SOXQ — The Low-Cost SOXX Alternative

SOXQ tracks the same Philadelphia Semiconductor Index as SOXX but charges 0.19% vs 0.35%. For long-term holders, this expense difference compounds meaningfully.

Trade-off: Lower AUM and liquidity than SOXX. For large positions or frequent trading, SOXX’s liquidity may justify the higher expense.

PSI — The Quant Approach

PSI uses Invesco’s Dynamic methodology, selecting stocks based on multiple factors including momentum, value, and quality. This creates active-like exposure in an ETF wrapper.

When to consider: If you believe factor-based selection can add value over passive cap-weighting.

FTXL — The Lower-Volatility Option

FTXL weights holdings based on volatility, giving more weight to less-volatile semiconductor stocks. This creates a smoother ride but may lag in strong rallies.

When to consider: If you want semiconductor exposure with reduced volatility.

Leveraged & Inverse Semiconductor ETFs

3x Leveraged (Direxion)

SOXL is one of the most actively traded leveraged ETFs in the market. It provides 3x daily exposure to the ICE Semiconductor Index (similar composition to SOXX).

Key mechanics:

• Daily reset: The 3x leverage resets daily, creating path dependency
• Volatility decay: In choppy markets, both SOXL and SOXS can lose value
• Compounding: In strong trends, returns can exceed 3x; in reversals, losses compound

When traders use SOXL/SOXS:

• Short-term directional bets (days, not weeks)
• Hedging existing semiconductor positions
• Trading around earnings or events

2x Leveraged (ProShares)

The 2x products have less volatility decay than 3x but also less leverage. They track a different index (Dow Jones U.S. Semiconductors) than the Direxion products.

When to prefer 2x over 3x:

• Holding period of 1-2 weeks (less decay)
• Lower risk tolerance
• Smaller position sizing

Leveraged ETF Decay — Why It Matters

Consider a simple example:

The index is down 1%, but SOXL is down 9%. This is volatility decay in action. The more volatile the underlying, the worse the decay.

Rule of thumb: Only hold leveraged semiconductor ETFs when you have high conviction on direction AND low expected volatility.

Which ETF for which situation?

How do semiconductor ETFs relate to each other?

The ETF Hierarchy

  flowchart TD
    A[**SMH / SOXX**<br/>Mega-cap weighted] --> B[**XSD**<br/>Equal-weight, small-cap tilt]
    B --> C[**SOXL / USD**<br/>Leveraged, short-term]
    
    A -.- D[Core exposure]
    B -.- E[Higher beta]
    C -.- F[Tactical trades only]

• SMH leads in mega-cap-driven rallies (AI hype, NVIDIA earnings)
• XSD leads when breadth expands and small-caps participate
• Leveraged ETFs amplify moves but decay over time

Key Ratios to Monitor

Quick reference

Sources