SOXQ ETF: Front-Row Exposure to Semiconductor Stocks and AI
Stock Analysis & Ideas

SOXQ ETF: Front-Row Exposure to Semiconductor Stocks and AI

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Earnings results and guidance from Nvidia and Marvell show that AI continues to have massive potential. Dollar-cost averaging into a low-cost semiconductor ETF like SOXQ, which has large positions in Nvidia, Marvell, and AMD, could be a good way to gain exposure to the long-term megatrend.

To say that animal spirits have returned to the semiconductor space would be an understatement. It seems like a long time ago now, but the sector actually struggled mightily in 2022. However, advances in artificial intelligence (AI), and the tantalizing long-term opportunity that this technology presents, have reignited investor enthusiasm for this sector of the market, as investors increasingly appreciate the fact that semiconductors are fueling the AI revolution.

After Nvidia’s blowout first-quarter earnings call (more on that later), sell-side analysts from Susquehanna called AI the “new gold rush” and hailed Nvidia as the company selling the picks and shovels for it. Nvidia is dominating the headlines right now, and rightfully so, but remember that there are also other chip stocks providing these AI “picks and shovels,” including Marvell and Advanced Micro Devices.

One way to invest in these picks-and-shovels plays collectively is with a concentrated semiconductor ETF like the Invesco PHLX Semiconductor ETF (NASDAQ:SOXQ). Therefore, let’s take a look at this semiconductor-centric ETF that gives investors significant exposure to these leading semiconductor companies.

What is SOXQ ETF?

SOXQ is a relatively small $128 million ETF from Invesco that invests in the PHLX Semiconductor Sector Index. The Index is designed to measure the performance of the 30 largest U.S.-listed semiconductor stocks; it encompasses all parts of the semiconductor supply chain, including companies “engaged in the design, distribution, manufacture and sale of semiconductors,” according to Invesco. The index and fund are reconstituted on an annual basis and rebalanced quarterly. 

With investor enthusiasm for AI and semiconductors surging, it’s perhaps unsurprising that SOXQ is up 38% year-to-date. The ETF only launched in 2021, so it doesn’t have much of a long-term track record.

SOXQ also features a very reasonable expense ratio of just 0.19%. This means that an investor putting $10,000 into SOXQ would pay just $19 in fees over the first year. This expense ratio compares favorably to that of some of the most popular semiconductor ETFs on the market, like the iShares Semiconductor ETF (NASDAQ:SOXX) and the VanEck Semiconductor ETF (NASDAQ:SMH), which both have expense ratios of 0.35%.

Its also far cheaper than some of the notable AI-specific ETFs out there, like the Global X Robotics & Artificial Intelligence ETF (NASDAQ:BOTZ) or the ARK Autonomous Technology & Robotics ETF (BATS:ARKQ), which have higher expense ratios of 0.69% and 0.75%, respectively. Investing in ETFs with low fees helps you to preserve the value of your portfolio over time.

SOXQ’s Holdings

SOXQ is not particularly diversified — it has only 31 holdings, and its top 10 holdings account for 64.5% of the fund. Nevertheless, if you’re looking for undiluted exposure to semiconductors and names like Nvidia, AMD, and Marvell, to name a few, this isn’t necessarily a problem.

SOXQ gives investors significant exposure to these AI leaders. Nvidia is the fund’s top holding, with an 11.2% weighting.

At this point, even the most casual investor is likely aware of Nvidia’s day for the ages when it reported blowout earnings. Nvidia, which had already more than doubled in price in 2023 and was one of the largest companies in the world by market cap, added almost $184 billion to its market cap in one day with a 24% gain, falling just shy of the largest single-day gain in market cap in history.

Nvidia forecasted current quarter sales of approximately $11 billion, a 64% increase year over year, blowing out analyst estimates of $7.2 billion. CEO Jensen Huang says that generative AI applications like ChatGPT are driving demand for its chips, as these types of applications require substantial computing power.

ChatGPT was only unveiled to the public last November, but it quickly became a sensation, hitting over 100 million users in just two months on its way to becoming the fastest-growing application of all time. The aforementioned Susquehanna analysts marveled at the fact that the virality of these applications is already translating into increased orders for Nvidia, calling it “unimaginable.”

AMD isn’t far behind Nvidia, with a 10.8% weighting in SOXQ. AMD has its own lineup of AI chips, and analysts from Morgan Stanley recently acknowledged that AMD’s AI opportunity may be much more substantial than they initially forecasted. Analysts from the investment bank said that they initially expected AMD to have AI revenue of $100 million in 2024 but that they could generate as much as $400 million, or even $1.2 billion, in a bull case scenario.

Beyond these two juggernauts, SOXQ is composed of a who’s who of other top semiconductor companies. Broadcom is the third-largest holding with a 9.1% weighting. Texas Instruments, which makes the analog chips that are crucial for all digital devices, comes in fourth with a 6.9% position.

You’ll also find semiconductor fabricators like Taiwan Semiconductor and ASML Holding, which are cornerstones of the semiconductor supply chain and manufacture chips for the likes of Nvidia and AMD. Lam Research, also represented here with a 4.3% weighting, makes and services equipment that is needed for the manufacturing of semiconductors. You can almost think of these types of companies as the picks-and-shovels providers to the picks-and-shovels providers.

Lastly, the aforementioned Marvell makes up 4% of the fund. Marvell saw Nvidia’s blowout results and historic gain and said, “Hold my beer” when it reported earnings. In other words, shares of Marvell surged almost 30% for the day. On its call, Marvell broke out AI-related revenue and said that revenue from its AI business was $200 million last year. It expects AI revenue to double each of the next two fiscal years.

Below, you can view SOXQ’s top 10 holdings.

What is the Price Target for SOXQ Stock?

Analysts collectively view SOXQ as a Moderate Buy, but the average SOXQ stock price target of $29.70 implies upside potential of ~8% from current prices. Of the 442 analyst ratings on SOXQ, 68.35% are Buy ratings, 27.52% are Holds, and 4.13% are Sells. 

Additionally, SOXQ has an impressive ETF Smart Score of 8. As this is an article about semiconductors and AI, it’s only right to take a look at how quantitative, non-human models view SOXQ.

The Smart Score is TipRanks’ proprietary quantitative stock scoring system that evaluates stocks on eight different market factors. The result is data-driven and does not require any human intervention. A Smart Score of 8 or above is the equivalent of an Outperform rating.

Looking Ahead

In conclusion, SOXQ is a strong, low-cost way to get exposure to the picks-and-shovels plays that will continue to benefit from the AI megatrend. It’s hard to argue that companies like Nvidia, AMD, and Marvell won’t be key players in advancing this technology for years to come.

In the short term, all of these stocks are making new 52-week highs, and it’s likely that some of them will pull back at some point. On the other hand, I also wouldn’t want to not have exposure to these names, as AI is clearly here to stay and is just getting started on disrupting many industries.

Thus, my strategy (not financial advice) with an ETF like this would be to start a position now to get a foothold in this part of the market and then to dollar cost average over time on pullbacks on my way to building a full position.


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