“Equal-weight Semis: SOXX on the Edge? Watch Now to Find Out!” (Free)

The semiconductor industry has been showing signs of strength as investors have poured significant amounts of money into the sector. The Philadelphia Semiconductor Index, also known as SOX, is well above its all-time high and has been one of the biggest outperformers this year. However, there are now indications that the SOX may be poised to pullback as yields reach multi-year highs and inventories swell. This raises an interesting question – is the Equal Weighted Semiconductor Sector (SOXX) next in line for a breakdown? In order to answer this question, we must first look at the fundamentals of the SOXX. The index is comprised of the 30 largest semiconductor companies, and is weighted equally. This means that all of its members are treated equally regardless of their respective size or market capitalization. This provides a more accurate representation of the underlying industry as it eliminates the bias which inherently comes from market capitalization weighted indices. As a result, the Equal Weight Semiconductor Sector (SOXX) has been a much better performer than its market capitalization weighted counterpart, as it provides investors with access to some of the best semiconductor growth stories. Despite this outperformance, however, the index is now exposed to some of the same risks that have plagued the broader SOX. In particular, higher yields and the threat of increased inventories have the potential to weigh heavily on the sector. Moreover, the SOXX is now facing an additional headwind in the form of video memory chip shortages. This is due to the current supply issue of NAND Flash memory chips which is hampering the production of new video game consoles and PCs. For these reasons, investors should be cautious about investing in the Equal Weighted Semiconductor Sector (SOXX). While the index has been a better performer than the broader SOX, it could be the next sector to show signs of weakness as yields continue to rise and the market is plagued by video memory chip supply issues. As such, investors should take a wait and see approach, as the SOXX may be due for a correction.