NEW YORK (TheStreet) -- Although rising demand for semiconductors has the sector climbing higher on renewed optimism, ETFs with a focus on the industry have performed poorly year to date. Here's how to play a reversal in that performance in the coming weeks.One of the driving forces for chip demand this year is the upgrade cycle. Many firms have delayed new technology investments. On top of the global recession, there was the negative opinion of the Windows Vista operating system. But Windows 7 has replaced Vista and the economy is picking up, leading firms to consider hardware and software upgrades for the first time in years. Two of the big players and well known names in the semiconductor sector are Texas Instruments ( TXN) and Intel ( INTC), and they're prominent in the semiconductor ETFs as well. TXN and INTC are both included in what I see as the two most balanced semiconductor focused funds, iShares S&P North American Technology-Semiconductors Index Fund ( IGW) and SPDR S&P Semiconductor Index ( XSD). INTC accounts for 8.4% of IGW and 4.2% of XSD while TXN accounts for 7.5% of IGW and 4.4% of XSD. In terms of company allocations, XSD is the more balanced fund, since the majority of its 27 holdings account for between 3.6% and 4.6% of net assets. That doesn't mean IGW is unbalanced. The fund only allocates 8.4% to its largest holding, INTC, and with 52 total holdings, it offers exposure to nearly twice as many companies as XSD. Both funds are finely balanced in comparison to another popularly traded fund with a focus on the sector, Semiconductors HOLDRs ( SMH). For instance, INTC and TXN account for 23% and 19.8% of SMH, respectively. In addition to being more balanced than SMH, IGW and XSD also do not place a minimum on the number of shares an investor must buy, whereas with SMH, the minimum is 100 shares. Despite positive sentiment in the industry, year to date IGW and XSD are down by 1.6% and 2.1%, respectively, in comparison to a flat return for the S&P 500.
SMH managed to outperform IGW and XSD, but it is still slightly underperforming the S&P 500 with a decline of 1.3% so far in 2010. Another way to play a rebound in the semiconductor sector is to gain exposure via international ETFs with large sector exposure. There are two country-specific ETFs that spring to mind. The first is iShares MSCI Korea Index Fund ( EWY). The fund's top holding is Samsung, which accounts for a hefty 18.1% of holdings. In its last earnings report, Samsung noted that its chip business was a significant source of revenue growth for the company. More recently, the company announced that it would be investing $3.6 billion in a chip production plant in Austin, Texas, in a bullish gesture that future chip demand will stay strong. Another international play on semiconductors is iShares MSCI Taiwan Index Fund ( EWT). This fund's top holding, accounting for 13.8% of assets, is Taiwan Semiconductor Manufacturing ( TSM). In addition to TSM, the fund has several other tech-related companies outside of the specific semiconductor sector and information technology accounts for 60.8% of the assets in this ETF. In sum, the best way to play a rally in the semiconductor sector, with a domestic slant, is by using XSD or IGW. For an international play on the rally, EWT or EWY are the best choices. -- Written by Don Dion in Williamstown, Mass.