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Top 5 Performing Semiconductor ETFs Of The 1st Quarter

Semiconductors remain one of the hottest areas of the market with several ETFs delivering double digit gains.

The first quarter of 2021 wrapped up last week and the U.S. equity markets show little sign that they're ready to slow down anytime soon. The S&P 500 (SPY) gained more than 6%, while the small-cap Russell 2000 (IWM) was up nearly 13%.

The tech sector was actually an underperformer during the quarter having returned a mere 2%. Investors used a new stimulus package, optimism over vaccine distribution and the expectation for a broader rebound throughout the latter half of 2021 as a reason to rotate out of growth and into economically cyclical sectors, such as energy and industrials.

That doesn't mean there weren't solid gains to be had within segments of the tech sector. The semiconductor group remained hot and returned more than 12% during the quarter and positioned itself among the market's leaders.

Leveraged semiconductor ETFs, not surprisingly, were the best performers, although gains in excess of pure index plays were relatively modest as volatility produced some steep short-term losses as well. If you were on the wrong side of the semiconductor trade in Q1 and you held the Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS) throughout (which you shouldn't since this is designed as a short-term trading vehicle), you would have lost more than 45%.

But let's focus on the positives. Semiconductors had another great quarter and with the economic recovery looking to be firmly intact, especially after last Friday's blowout jobs report, this rally could continue well into the summer. The current P/E ratio of 37 on the portfolio would be cause for concern if we start seeing multiple contractions for pricier sectors like we did several weeks ago, but I'm thinking the longer-term picture still looks favorable here.

With that being said, here are the top 5 performing semiconductor ETFs for the 1st quarter of 2021.

Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL)

I'm still amazed at the sheer size of this fund (more than $4 billion in total assets despite the fact that it's meant to be a short-term trading product), but Q1's performance helps demonstrate that a lot of investors still use it as a buy-and-hold tool.

SOXL was up 22% when all was said and done, but there was a lot of volatility along the way. By the middle of February, SOXL was up 50% year-to-date, but by March 8th, it had given everything back and was down more than 10% on the year. SOXL is rarely worth it on a risk-adjusted basis for holding periods longer than several days, but for investors looking only at absolute returns, it can be a winner under the right conditions.

ProShares Ultra Semiconductors ETF (USD)

USD is the 2x leveraged version of the semiconductor sector, so it falls in between the pure index fund and SOXL. Its 16% first quarter return ranks second on this list, but the excess return was relatively minimal compared to what you could have earned with a pure semiconductor sector ETF.

USD is a fund that doesn't get a lot of attention since investors tend to view things from an "all or nothing" perspective - they either buy a semiconductor ETF for straight industry exposure or they swing for the fences with SOXL. USD can be something of a happy middle ground, but risk-adjusted performance tends to be pretty poor.

Invesco Dynamic Semiconductors ETF (PSI)

PSI accounts for a scant 3% of all semiconductor ETF assets, so it's easy for this fund to fall under the radar, but it's actually been the best-performing non-leveraged semiconductor ETF over the past year having gained more than 120%. It also returned 15% during the 1st quarter.

PSI is actually a nice investment option for those who want more than just pure exposure to a market cap-weighted portfolio of semiconductor stocks. PSI invests in just 30 companies, but considers price momentum, earnings momentum, quality, management action, and value in its decision-making process, so it ends up being a factor ETF as much as a sector ETF.

iShares PHLX Semiconductor ETF (SOXX)

This $6 billion portfolio, the largest in this space, was a solid performer, although a middling one comparatively speaking. Its 12% first quarter return easily beat the broader market, but put it squarely in the middle of performance among non-leveraged ETFs.

SOXX would be your choice if you wanted pure exposure to semiconductors without the bells and whistles. Since the portfolio is cap-weighted, it's heavily tilted towards the largest and most well-established names in the business. The large-cap overweight is probably a big part of the reason the fund underperformed PSI during the 1st quarter. PSI has a tilt towards smaller value names, which helped put it over the top.

VanEck Vectors Semiconductor ETF (SMH)

SMH looks a whole lot like SOXX in that it leans heavily into the mega-cap names. That probably also explains why its first quarter return of 11% is almost identical.

SMH is modestly cheaper than SOXX and has been around for a little longer. Other than that, there's not a whole lot of difference between the two big semiconductor ETFs.

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