SOXX vs. XLK: Semiconductor concentration vs. technology diversification… the key is the difference in returns and drawdowns
SOXX concentrates its investment in 30 semiconductor companies. Long-term returns have been high, but it experienced a 2022-year 45% decline. XLK diversifies across 72 technology stocks and has lower costs and volatility.
If you want to invest in technology stocks but are unsure whether to choose SOXX or XLK, this article provides the answer. Returns and the scale of losses differ completely depending on whether you go all-in on semiconductors or spread your investment broadly across technology. The key is to find your own loss tolerance between concentration and diversification.
SOXX is an ETF that invests only in 30 semiconductor companies. Because it is concentrated in a single semiconductor sector, returns can explode in a rising market, but in a falling market it also takes the full hit from selling pressure.
XLK diversifies across 72 technology stocks. Because it holds many securities, other holdings can absorb the shock even if a particular semiconductor company suffers a major setback. Its management fee is also low, and its volatility is relatively contained.
Over the long term, there have been periods when SOXX posted higher returns. However, 2022it fell by as much as 45%. This figure shows the extent of the losses felt when the semiconductor cycle turns downward.
XLK benefited significantly from diversification during the market downturn over the same period. Its broad holdings help prevent a shock in a particular sector from spreading across the entire portfolio. The decline was much more gradual.
The criteria for choosing between the two ETFs are simple.
- SOXX if you have strong conviction in a semiconductor rally and can withstand a % decline
- XLK if high fees and extreme volatility are a concern and you want stable exposure to technology stocks
- Check the allocation of your other current holdings and balance the portfolio so that it is not tilted toward a particular sector45:- SOXX if you have strong conviction in a semiconductor rally and can withstand a % decline
- XLK if high fees and extreme volatility are a concern and you want stable exposure to technology stocks
- Check the allocation of your other current holdings and balance the portfolio so that it is not tilted toward a particular sector
Sources: The Motley Fool
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