USD: An ETF For Investors To Double Down On Semiconductor Growth In 2024 And Beyond

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Investment Thesis

ProShares Ultra Semiconductors ETF (NYSEARCA:USD) warrants a buy rating to take advantage of expected semiconductor industry growth in 2024 and over the next decade. While late 2022 saw a decline in the semiconductor industry, 2024 is expected to see a solid rebound. Although multiple semiconductor ETFs exist, USD utilizes derivative contracts to outperform the daily performance of the semiconductor industry. Therefore, investors seeking increased returns from the semiconductor industry and willing to accept higher risk may achieve their objectives with USD.

Fund Overview and Compared ETFs

USD is an ETF that seeks to achieve magnified returns from the U.S. semiconductor industry. This includes holdings focused on the production of semiconductors, chips, circuit boards, and motherboards. With an inception in 2007 and a total of $364M in AUM, USD contains 41 holdings with the greatest weight on index swaps. ETFs used for comparison are SPDR S&P Semiconductor ETF (XSD) and VanEck Semiconductor ETF (SMH). A key difference between USD and these other compared ETFs is that USD includes derivative contracts. SPDR S&P 500 ETF Trust (SPY) is also used for a baseline comparison with the overall “market”.

Semiconductor Industry Growth and Market

The semiconductor market is expected to see significant growth over the next decade. Specifically, the industry is expected to reach over $1T in market size by 2030, resulting in a 12.28% CAGR. Majority of the current semiconductor production comes from Taiwan, South Korea, and Japan. The United States had a modest piece of the semiconductor pie with approximately 12% in 2021.

Late 2022 was a rough time for the semiconductor industry. A chip shortage was seen during the COVID-19 pandemic through the early part of 2022. Following a correction in supply, certain chips became oversupplied. This oversupply resulted in contracted growth and therefore a decline in share price for many semiconductor companies in late 2022.

Looking forward to 2024, inventories are expected to stabilize. Furthermore, the semiconductor industry will see high demand from artificial intelligence and robotics. This growth has already been seen in 2023 with strong returns for U.S. companies such as NVIDIA Corporation (NVDA) and Broadcom Inc. (AVGO). Therefore, ETFs that contain these companies will likely do well in the next couple years. For investors looking to “double down”, USD offers a higher risk opportunity to take advantage of expected semiconductor profits.

Performance, Expense Ratio, and Dividend Yield

ProShares itself states that USD is intended to reach specific “daily goals”. This includes yielding two times the daily performance of semiconductor-focused equities. Therefore, the fund was not specifically designed for buy-and-hold, long-term investors. However, ProShares’ USD has a 10-year CAGR of 37.02%. Because of its index swap and derivative holdings, USD has seen higher returns than traditional, non-derivative ETFs. For example, XSD has seen a 10-year CAGR of 21.90% while SMH has seen a 24.36% 10-year CAGR. Therefore, while USD has historically seen over 2x in total price return from non-derivative ETFs, it has not quite achieved a 2x CAGR over the 10-year time period examined.

Total Price Return Semiconductor ETFs — 10-Year Total Price Return for USD and Examined Semiconductor ETFs (Seeking Alpha)

In addition to its high risk, another drawback for USD is its expense ratio. While non-derivative semiconductor ETFs, XSD and SMH, have an expense ratio of 0.35%, USD is notably higher at 0.95%. Because holdings like NVDA, Taiwan Semiconductor (TSM), and ASML Holding (ASML) are focused on growth, semiconductor ETFs have a low dividend yield. All semiconductor ETFs examined have a dividend yield of less than 1%, with USD having a negligible yield.

Expense Ratio, AUM, and Dividend Yield Comparison

	USD	XSD	SMH
Expense Ratio	0.95%	0.35%	0.35%
AUM	$364.70M	$1.49B	$11.11B
Dividend Yield TTM	0.05%	0.31%	0.62%
Dividend Growth 3 YR CAGR	-17.19%	-1.36%	4.95%

Source: Multiple, Compiled by Author, 22 Dec 23

USD Holdings and Market Risk

Because USD’s objective is to 2x the semiconductor industry’s returns, it includes several index swap holdings. These holdings can achieve increased returns but at elevated risk. In addition to index swap holdings, USD has a large stake in NVDA (27.80%) and AVGO (11.37%). In contrast, XSD has only 2.61% weight on NVDA and 2.75% weight on Advanced Micro Devices, Inc. (AMD). SMH, which has seen better performance than XSD, has a heavier weight on NVDA (19.46%) and includes TSM (9.00%).

Top 10 Holdings for USD and Semiconductor ETFs

USD – 41 holdings	XSD – 39 holdings	SMH – 26 holdings
DJ U.S. Semiconductors Index Swap UBS AG – 59.63%	AVGO – 3.02%	NVDA – 19.46%
NVDA – 27.80%	FSLR – 2.96%	TSM – 9.00%
DJ U.S. Semiconductors Index Swap JP Morgan Securities – 19.16%	MXL – 2.92%	AVGO – 6.19%
DJ U.S. Semiconductors Index Swap Morgan Stanley – 15.24%	LSCC – 2.89%	AMD – 5.41%
AVGO – 11.37%	ALGM – 2.89%	INTC – 5.15%
DJ U.S. Semiconductors Index Swap Bank of America – 8.45%	MU – 2.89%	ASML – 4.93%
DJ U.S. Semiconductors Index Swap BNP Paribas BOA – 8.45%	MRVL – 2.89%	LRCX – 4.55%
DJ U.S. Semiconductors Index Swap Societe Generale – 6.12%	WOLF – 2.87%	AMAT – 4.54%
DJ USSC Swaps Notional – 5.64%	DIOD – 2.82%	QCOM – 4.46%
AMD – 5.19%	SMTC – 2.81%	ADI – 4.42%

Source: Multiple, compiled by author on 22 Dec 23

All ETF investors know that a fund’s future performance is dependent on the performance of its individual holdings. USD’s performance will be more volatile than XSD or SMH either positively or negatively due to the nature of its holdings. The direction of performance will likely depend on the semiconductor market risk and outlook for 2024. While strong industry growth is expected, I will cover more on market and geopolitical risk later in this article.

Valuation and Risks to Investors

USD is currently trading at $53.35 at the time of this article. This price is just below its 52-week high of $54.24. While USD has seen an impressive YTD price return of 230%, its P/E and P/B ratios are roughly on par with peer ETFs, XSD and SMH.

Semiconductor ETF Performance — YTD Price Return for USD and Semiconductor ETFs (Seeking Alpha)

Looking at the individual holdings of the semiconductor ETFs compared, several holdings have high valuation metrics. For example, NVDA is at a forward P/E GAAP of 43.86, over 50% higher than its sector. Another holding of USD and SMH is AVGO. Having seen an impressive 100% price return YTD, AVGO has a forward price/sales ratio 200% higher than its sector and forward price/book ratio over 450% compared to its sector.

Valuation Metrics for USD and Compared Semiconductor ETFs

	USD	XSD	SMH
P/E ratio	29.26	29.39	28.31
P/B ratio	6.55	4.19	6.06

Source: Compiled by Author from Multiple Sources, 22 Dec 23

Given the expected stabilization of the semiconductor supply, one can reasonably expect growth of the semiconductor industry in 2024. Subsequently, I expect USD to see outsized returns compared to XSD and SMH and very likely outpace the S&P 500 index by a significant margin.

Although USD returns could be substantial in 2024, the fund carries high risk. First, index swaps themselves have inherent risks, including high market risk. Even the non-derivative semiconductor ETFs have experienced high volatility. For example, the 3-year beta for SMH is 1.45 compared to the S&P 500 index. Additionally, SMH volatility measured by standard deviation is 32.30. USD’s 5-year beta is 3.02 compared to the S&P 500 index, indicating very high volatility.

In addition to the market risk discussed, geopolitical risk is perhaps the largest risk factor for the semiconductor industry. Taiwan produces over 60% of the world’s semiconductors. While demand is not expected to slow, the conflict between China and Taiwan could have devastating impacts on semiconductor production. While some sources predict that China could be ready to invade Taiwan by 2025, top defense officials from both the U.S. and China held talks recently, potentially easing tensions.

Concluding Summary

USD has seen a total price return of over 2,000% over the past 10 years through the use of derivatives and index swap holdings. This results in a high-risk fund that seeks to achieve 2x returns of the semiconductor industry. Although the semiconductor industry is expected to see growth in 2024 and beyond, the industry is subject to various risk factors that could result in a decline. Such a decline would result in a significant share price reduction for USD. 2023 has already seen strong returns in the semiconductor industry pointing towards greater returns ahead. Therefore, investors willing to take on additional risk for potentially 2x returns of the semiconductor industry should consider USD. Investors looking for exposure to the semiconductor industry with less risk than USD may also consider SMH, which has outperformed XSD historically.