Tech Investors Are Choosing SOXX Over SPX — Here’s Why

Can investors get technology-sector exposure with exchange traded funds (ETFs) that track the S&P 500 or SPX? Sure, but many people are choosing the iShares Semiconductor ETF (NASDAQ:SOXX | SOXX Price Prediction), which doesn’t track the S&P 500, to give an extra tech-fueled boost to their portfolios in the 2020s.

In some respects, the SOXX ETF doesn’t match up to popular S&P tracking funds like the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) and the Vanguard S&P 500 ETF (NYSEARCA:VOO). However, tech-focused ETFs can provide enhanced growth to your portfolio, and the iShares Semiconductor ETF might actually be a better choice than SPX for the long term.

Diversification vs. Concentration

To understand the main difference between the iShares Semiconductor ETF and a fund that tracks the S&P 500, such as SPY or VOO, we can look at SOXX’s list of holdings. As we’ll discover, this particular iShares fund focuses on famous names in the semiconductor space.

Granted, the SPY ETF includes semiconductor-sector giants like NVIDIA (NASDAQ:NVDA), Advanced Micro Devices (NASDAQ:AMD), and Broadcom (NASDAQ:AVGO). The VOO ETF’s holdings list also includes these semiconductor stocks.

It’s fair to say that SPY and VOO, each of which comprises roughly 500 stocks, are much more diversified than the SOXX ETF. Indeed, with the iShares Semiconductor ETF you’ll only get portfolio exposure to 35 stocks.

The point is that SPY and VOO are highly diversified funds that include non-tech-sector names like Citigroup (NYSE:C), Coca-Cola (NYSE:KO), Exxon Mobil (NYSE:XOM), and Home Depot (NYSE:HD). In contrast, the iShares Semiconductor ETF is heavily concentrated into the semiconductor category. Therefore, SOXX may be considered riskier than funds that track the S&P 500.

Comparing Fees and Yield

There are other areas in which the iShares Semiconductor ETF doesn’t match up to popular funds that track the S&P 500. For one thing, the SOXX ETF deducts operating fees (also known as the expense ratio) totaling 0.34% per year.

That’s not exorbitant, by any means. However, SPY’s expense ratio is only 0.0945% while VOO’s expense ratio is rock-bottom at 0.03%. Hence, the iShares Semiconductor ETF isn’t quite as low-cost as SPY and VOO.

Additionally, the iShares Semiconductor ETF offers passive income investors an expected annual dividend yield of 0.58%. That’s respectable, but it doesn’t compare favorably to SPY’s 1.08% dividend yield and VOO’s 1.17% yield.

A Deeper Sector Dive With SOXX

So far, it looks like funds that follow the S&P 500 are superior to the iShares Semiconductor ETF. This raises the question of why tech investors would favor the SOXX ETF over lower-fee, higher-yielding picks like SPY and VOO.

One possible reason to choose the iShares Semiconductor ETF is that you might already have sufficient broad-market, multi-sector participation in your portfolio. If you’re already invested in other economic sectors and want more tech exposure, SOXX isn’t a bad choice. 

After all, there’s more to the iShares Semiconductor ETF than NVIDIA and Advanced Micro Devices and Broadcom. In the holdings list of the SOXX ETF, you’ll also find less famous but nonetheless important semiconductor-sector players like Lattice Semiconductor (NASDAQ:LSCC), NXP Semiconductors (NASDAQ:NXPI), and ST Microelectronics (NYSE:STM).

In other words, investors can dive deeper into the semiconductor space with the iShares Semiconductor ETF than they could with a fund that only follows SPX. Could SOXX’s single-sector concentration lead to better results, though?

SOXX’s Powerful Performance

We live in a time when a multitude of electronic devices need semiconductors. Truly, today’s modern society would be unthinkable without semiconductors.

That’s why many firms in the semiconductor space generate robust revenues and reward their shareholders with outstanding results. Past performance doesn’t guarantee future outcomes, but the previous share-price performance of the iShares Semiconductor ETF suggests that it might continue to beat SPX-tracking funds like SPY and VOO.

This isn’t to suggest that the S&P 500 has performed poorly in recent years. As this chart shows, the SPY ETF’s share price has grown by approximately 86% during the past five years.

Similarly, the VOO ETF’s share price gained around 86% in a five-year period.

That’s nothing to sneeze at, and investors in SPY and VOO also collected dividends totaling around 1% per year. On the other hand, the iShares Semiconductor ETF’s share price zoomed nearly 139% higher over the past five years.

Certainly, the dramatic share-price outperformance of the iShares Semiconductor ETF makes up for the higher expense ratio and the lower dividend yield. Now, we’re starting to see why many tech investors hope to beat the S&P 500 with a sector-specific fund like SOXX.

Still, even if you’re willing to accept higher risk, you don’t have to go all-in on the iShares Semiconductor ETF. To achieve a more balanced portfolio, consider purchasing SPY or VOO shares and then add a few SOXX shares for a potential profit boost.