How to interpret the proportion of Philadelphia Semiconductor Component Stocks? A comprehensive guide to understanding SOX investment logic

Why Should You Follow the Philadelphia Semiconductor Index?

AI is booming, chip prices are rising steadily, and more investors want to capitalize on this wave of benefits. However, picking individual stocks carries high risks and the potential to make mistakes. At this point, the Philadelphia Semiconductor Index (SOX) has become the first choice for many.

Compared to betting on a single company, tracking the entire semiconductor industry is more reliable. The Philadelphia Semiconductor Index covers 30 listed U.S. semiconductor companies, including design, manufacturing, and sales across the full industry chain, providing a comprehensive reflection of industry trends.

Data speaks: From June 2008 to June 2022, over 14 years, the SOX’s return was as high as 637.9%, far surpassing the S&P 500’s 209.6%. By May 2024, SOX hit a record high of 40077.4 points.

What Is the Philadelphia Semiconductor Index?

Simply put, SOX is a capitalization-weighted index jointly launched by NASDAQ and the Philadelphia Stock Exchange, tracking leading U.S. semiconductor companies.

What makes this index special? It’s not just a random selection of 30 semiconductor-related companies; it has strict screening standards:

• Core business must be semiconductor design, manufacturing, distribution, or sales
• Must be listed on NASDAQ, NYSE, NYSE American, or Chicago Options Exchange
• Market capitalization over $100 million
• Listed on the exchange for at least 3 months
• Monthly trading volume over 1.5 million shares within the last 6 months
• Stocks must be listed on a registered U.S. market or eligible for options listing
• The company cannot be in bankruptcy proceedings

Every September, SOX re-evaluates its components based on these standards to maintain industry representation and liquidity.

Composition and Weighting of the Philadelphia Semiconductor Index

SOX includes the 30 largest semiconductor-related stocks, but weights are not evenly distributed. Component weights directly reflect market capitalization, with larger companies having higher proportions.

Based on the latest data, the top five weighted stocks are:

1. NVIDIA (NVDA)
Market Cap: $3.22 trillion, the undisputed top weight in SOX. The demand for AI chips is exploding, and NVIDIA’s GPU chips are essential for data centers and AI training. Since late 2022, NVIDIA’s stock price has surged dramatically, giving it the greatest influence on the index.

2. TSMC (TSM)
Market Cap: $767.178 billion. The world’s largest contract chip manufacturer, holding 54% of the 5nm and 7nm chip market share. Recently, it has been actively advancing 3nm mass production, with 2nm R&D underway. TSMC also plans to build three wafer fabs in Arizona, USA, with 4nm production starting in the first half of 2025, which is very favorable for its long-term profitability.

3. ASML
Market Cap: $410.693 billion. Controls lithography equipment technology, a critical bottleneck in chip manufacturing. Without ASML’s equipment, major chipmakers cannot produce advanced process nodes, which explains its high market value.

4. AMD
Market Cap: $261.487 billion. A strong competitor to Intel, increasing its market share in data centers from less than 5% at the end of 2020 to 22% by mid-2022. Its latest earnings report exceeded expectations, with explosive growth in the data center segment.

5. ON Semiconductor (ON)
Market Cap: $29.097 billion. Supplies automotive, industrial, and 5G cloud technologies, benefiting greatly from smart power and sensor tech in electric vehicles.

These five companies constitute most of SOX’s weight, with NVIDIA and TSMC holding the largest shares. Understanding the movements of these two companies essentially allows you to grasp the overall trend of SOX.

Is the Philadelphia Semiconductor Index a Good Investment?

Honestly, the semiconductor sector is definitely worth paying attention to.

Long-term returns: Since its inception, SOX has gained 1184%, compared to only 801% for the S&P 500. Over the past decade, SOX outperformed the market in 7 years, with a 635% increase, while the S&P 500 only rose 168%.

Short-term volatility opportunities: In 2022, the semiconductor industry faced a collective downturn, with SOX falling 36.8%, and its component stocks averaging a 30% decline. But this also created excellent buying opportunities. If you bought then and held until today, long-term investors would have made significant profits, and short-term traders could profit from swings.

Future growth points:

• AI and data centers: led by NVIDIA and AMD
• Automotive electronics: benefiting ON Semiconductor, Qualcomm, NXP
• Industrial transformation: driven by Broadcom, Texas Instruments, Applied Materials

The world’s three major semiconductor giants—Intel, TSMC, and Samsung—plan to invest over $300 billion to expand production. The U.S. CHIPS Act allocates $50 billion, Europe $46 billion, and China $50 billion… Countries are pouring money into the semiconductor industry. What does this mean? Policy dividends will continue for a long time.

How to Invest in the Philadelphia Semiconductor Index?

Investors cannot directly buy or sell the SOX index itself, but there are two ways to participate:

Option 1: Track the SOX via ETFs

The most popular is iShares Semiconductor ETF (SOXX), which has high trading volume and liquidity.

In Taiwan, you can buy local brokerages’ funds like Cathay U.S. Philadelphia Semiconductor Fund (code: 00830) or Fubon Taiwan Semiconductor ETF (00892), which are more convenient and cheaper.

Option 2: Trade component stocks via CFDs

CFDs are financial derivatives that track the underlying asset’s price. Compared to ETFs, their advantages include:

• No expiration date, so you can hold as long as you want
• Support both long and short trading
• 24-hour trading
• Adjustable leverage, allowing small capital to start trading

Many investors use CFDs for short-term trading or hedging strategies.

What Pitfalls Should You Watch Out for When Investing in Semiconductors?

1. Geopolitical Risks

U.S. restrictions on Chinese chips are tightening. China consumes about a quarter of global semiconductor equipment. If the market gets cut off, companies like Qualcomm, Micron, NVIDIA, AMD will lose key customers, and their stock prices will be pressured.

2. Demand Cycle Risks

Semiconductors are a typical cyclical industry. In recent two years, PC and mobile phone shipments have declined sharply, and demand remains weak. The biggest risk is investors realizing that 2023 demand has not bottomed out, leading to further stock price drops.

3. Macroeconomic Risks

During the Federal Reserve’s rate hike cycle, profitability in the tech sector will face increased pressure. If recession fears grow, the entire tech sector, including semiconductors, could be hit hard. Conversely, if the Fed shifts to rate cuts and economic growth expectations rebound, semiconductor demand will also recover.

Summary

The Philadelphia Semiconductor Index is the best tool to track the entire industry. NVIDIA and TSMC are the largest component stocks, and their performance largely determines SOX’s trend.

To invest in semiconductors, you can choose ETFs for diversification or trade CFDs of component stocks for short-term gains. The key is to keep an eye on these industry leaders and policy directions.

The semiconductor sector will exist long-term, supporting AI, new energy vehicles, and industrial transformation. Interested investors should study SOX and its components’ trends in depth.