| Semiconductor Index (SOX) |
Overview:
The Semiconductor Index, or SOX, is an index created by and traded on the
Philadelphia Stock Exchange. It was introduced on December 1, 1993 with a
split-adjusted value of 100. The SOX is the most widely recognized index that
investors use to track the performance of semiconductor makers and equipment
manufacturers. Because it tracks the cyclical semiconductor industry, it has
been a very volatile over the years. After rising to fresh all-time highs above
1300 in March of 2000, the index subsequently gave up over -80% of its value,
plummeting to a low of around 200 in late 2002.
Composition:
The Semiconductor Index is comprised of 18 stocks that almost fully represent
the semiconductor industry. The index includes 14 firms that manufacture
semiconductors and four that produce semiconductor equipment. It is a
price-weighted index, meaning that firms with higher stock prices have greater
influence on the index. Because of this, some of the fund's largest components,
such as Intel (INTC), are weighted towards the middle of the index and not at
the top.
The table below lists the components of the
Semiconductor Index along with the weighting that each stock carries in the
index (data as of August 2004):
| Company |
Symbol |
%
of Index |
| Maxim Integrated Products |
MXIM |
11.6% |
| KLA-Tencor |
KLAC |
10.1% |
| Linear Technology |
LLTC |
9.8% |
| Broadcom |
BRCM |
8.4% |
| Xilinx |
XLNX |
7.3% |
| Novellus Systems |
NVLS |
6.5% |
| Intel |
INTC |
6.0% |
| Altera |
ALTR |
5.2% |
| Texas Instruments |
TXN |
5.2% |
| STMicroelectronics |
STM |
4.5% |
| Applied Materials |
AMAT |
4.3% |
| National Semiconductor |
NSM |
4.1% |
| Teradyne |
TER |
4.0% |
| Motorola |
MOT |
3.9% |
| Micron Technology |
MU |
3.2% |
| Advanced Micro Devices |
AMD |
2.9% |
| Taiwan Semiconductor |
TSM |
1.8% |
| LSI Logic |
LSI |
1.2% |
Positives:
The Semiconductor Index provides broad exposure to the fast-growing (yet
extremely volatile) semiconductor industry. When investors want information
specific to semiconductors, this is where they look. In addition, many technical
traders have noted that a rise/decline in the SOX usually precedes a similar
move in the broader technology market. As such, the Semiconductor Index can
serve as a fairly accurate leading indicator for technology stocks.
Drawbacks:
Many investors have a problem with price-weighted indices because they may not
reflect the true makeup of the sector they cover. While it is true that a
market-cap weighting would more accurately reflect the industry's overall
performance, it wouldn't necessarily be perfect. For example, if this weighting
were followed, Intel alone would consist of over 20% of the index. This would
mean that the Semiconductor Index would basically track Intel and a few other
stocks--it would not be a very diverse index.
How can I trade/invest in this index?
There are numerous futures, options, and ETFs that attempt to track the
Semiconductor Index. Our favorite way to invest in the SOX is through the
Semiconductor HOLDR (SMH). Although this ETF does not implicitly track the SOX,
it has shown a remarkable correlation to it over the years. It is one of the
most liquid ETFs out there, and it charges a minimal management fee of just 8
cents per year (per share), which equates to a very low expense ratio of about
0.20%. The main drawback to SMH is that it, like every other HOLDR, can only be
traded in 100-share round lots. This puts the fund out of reach for many small
investors.
Additional Information:
Philadelphia
Stock Exchange SOX Page
Merrill
Lynch Semiconductor HOLDR (SMH)
