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):

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)  

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