XSD: An Equal Weight Approach To Semis That Limits Nvidia

You’d think that with all this AI hype, semi stocks broadly would be doing well. This of course until you dig deeper and realize how much of this narrative is being driven by just one stock (Nvidia, my fav!). Semiconductor stocks outside of Nvidia (NVDA) really haven’t done all that much since 2021, but perhaps there will be a rotation that favors them more broadly. If that’s the case, the SPDR S&P Semiconductor ETF (NYSEARCA:XSD) is one way to play it.

XSD is an investment fund that aims to replicate the performance of the S&P Semiconductor Select Industry Index. This index represents the semiconductors segment of the S&P Total Market Index (S&P TMI), which tracks the broad U.S. equity market. The semiconductors segment consists of companies that manufacture semiconductors, a critical component in many modern electronic devices. This index is equal-weighted and comprises large, mid, and small-cap stocks from the semiconductors sub-industry.

Key Features

XSD comes with several key features:

• Exposure to the Semiconductors Segment of S&P TMI: The fund provides exposure to a segment that includes companies involved in the design, distribution, manufacture, and sale of semiconductors.

• Tracks a Modified Equal-Weighted Index: The fund seeks to track an index that provides the potential for unconcentrated industry exposure across large, mid, and small-cap stocks.

• Strategic or Tactical Positions: The fund allows investors to take strategic or tactical positions at a more targeted level than traditional sector-based investing.

ETF Holdings

The SPDR S&P Semiconductor ETF comprises a diverse group of companies from the semiconductor industry. Nvidia is indeed the top position at 4.28%, which makes it a smaller allocation in the fund than you see in the market-cap weighted “diversified” S&P 500. This makes sense given the equal weighting of the index. The other stocks include familiar ones like Advanced Micro Devices, Broadcom, and Marvell.

Sector Composition and Weightings

No surprises here, but XSD is heavily concentrated in the technology sector, with semiconductors representing all of its holdings. The big thing to keep in mind (which is why I keep referencing it) is that the fund employs a strategy of equal weighting, which avoids concentration in any single security and provides potential for unconcentrated industry exposure across large, mid, and small-cap stocks.

Peer Comparison

When compared against other similar ETFs, XSD stands out due to its strategy of equal weighting and its focus on the semiconductors segment of the S&P TMI. That has also been why the fund has underperformed the VanEck Semiconductor ETF (SMH) for example. SMH has Nvidia as its top holding at 25%. When we look the price ratio of XSD to SMH, it’s no surprise that this alone is why SMH has done well.

This you can argue is a feature, not a bug of SMH. But at some point, the concentration risk of Nvidia is something you may want to avoid, which is why XSD is worth considering as an alternative now.

Pros and Cons

Like any investment, investing in XSD comes with its own set of advantages and potential drawbacks.

Pros

• Diversification: By investing in a broad range of companies within the semiconductor industry, the fund offers diversification, which can help to mitigate risk.

• Access to a Growing Sector: The semiconductor industry is a key component of the technology sector, which has been experiencing significant growth in recent years.

• Passive Management: The fund is passively managed, meaning it seeks to replicate the performance of an index rather than actively selecting securities. This can result in lower management fees.

Cons

• Sector-Specific Risk: Because the fund is focused on a single sector, it may be more volatile than more diversified funds.

• Market Risk: The fund’s investments are subject to changes in economic conditions and market fluctuations.

Conclusion

Investing in the SPDR S&P Semiconductor ETF can provide investors with diversified exposure to a key segment of the technology sector. However, like any investment, it’s important to consider both the potential rewards and risks involved. If you want to avoid high concentration in Nvidia after such a spectacular run, but at still bullish on semis, this is the fund for you.

Markets aren’t as efficient as conventional wisdom would have you believe. Gaps often appear between market signals and investor reactions that help give an indication of whether we are in a “risk-on” or “risk-off” environment.

The Lead-Lag Report can give you an edge in reading the market so you can make asset allocation decisions based on award winning research. I’ll give you the signals–it’s up to you to decide whether to go on offense (i.e., add exposure to risky assets such as stocks when risk is “on”) or play defense (i.e., lean toward more conservative assets such as bonds/cash when risk is “off”).