First Trust Nasdaq Semiconductor ETF: Quality‑Weighted Smart Choice for AI‑Driven Growth

Key Points

The artificial intelligence (AI) boom is largely powered by semiconductor stocks, as chipmakers supply the essential hardware for AI applications. While AI‑focused chips have enjoyed strong market demand, recent valuations and investment returns have tempered enthusiasm, prompting investors to seek more strategically selected opportunities.

One such option is the First Trust Nasdaq Semiconductor ETF (NASDAQ: FTXL). Though smaller than many prominent semiconductor ETFs, its deliberate construction and cash‑flow weighting make it a compelling choice in today’s market.

Here’s why.

Image source: Getty Images.

Unique Construction of the First Trust Nasdaq Semiconductor ETF

The ETF is passively managed, tracking the Nasdaq US Smart Semiconductor index, which applies a four‑factor screen—gross income, return on assets, momentum, and cash flow—to identify the top 30 to 50 chip stocks. The index’s selection threshold is driven by a lower score being superior, similar to a golf handicap system.

A distinguishing feature is its weighting methodology: holdings are weighted by cash flow rather than market capitalization. This approach prioritizes companies that generate robust operating cash, ensuring that high‑momentum, low‑cash‑flow AI names do not dominate the portfolio.

As a result, the ETF offers a focus on stable, profit‑generating bija, mitigating the risk of speculative exposure.

The current portfolio holds 34 semiconductor names, with Intel, Micron Technology, and Marvell Technology as the largest positions.

The structure also includes a cap on any single stock’s weight, maintaining a diversification that surpasses several larger sector ETFs.

Performance Highlights

Over the past year, the First Trust Nasdaq Semiconductor ETF delivered a remarkable 98% return year‑to‑date and a 161% total return. Its performance outpaces many non‑leveraged semiconductor ETFs.

With a shorter track record, the ETF still shows strength over the last three and five years: an average annual return of 54.4% and 30.7% respectively. These figures compare favorably to established ETFs such as VanEck Semiconductor ETF (NASDAQ: SMH), iShares Semiconductor ETF (NASDAQ: SOXX), Invesco Semiconductors ETF (NYSEMKT: PSI), and State Street SPDR S&P Semiconductor ETF uba>.

Data by YCharts.

Given its quality‑focused filters and cash‑flow weighting, the First Trust Nasdaq Semiconductor ETF presents a strong buy for investors seeking exposure to the semiconductor sector while managing valuation and momentum risk.

Investment Considerations

Potential investors should evaluate the ETF Check this section with your own financial strategy, monitoring both the broader market dynamics and the specific semiconductor landscape. While the ETF has shown impressive gains, it remains subject to sector rotation and macroeconomic developments that could influence its future performance.

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