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Some of the largest and most popular exchange-traded funds (ETFs) linked to the semiconductor industry are set for a makeover following a re-ranking of the index they track.
Among the funds affected are the iShares PHLX Semiconductor ETF (SOXX), the Direxion Daily Semiconductor Bull 3x Shares ETF (SOXL) and the Direxion Daily Semiconductor Bear 3x Shares ETF (SOXS). The iShares fund is the second-largest semiconductor-focused ETF by assets under management, with some $230 million in assets.
The funds are all linked to the PHLX Semiconductor Sector Index, an index sponsored by Nasdaq OMX Global Indexes, which, as of Monday 23 September 2013, will ditch one-third of its 30 constituents and replace them with new additions.
The ten securities to be removed from the index are Cirrus Logic, Hittite Microwave, InterDigital, MKS Instruments, Mellanox Technologies, Power Integrations, Rubicon Technology, STMicroelectronics, SunEdison and Veeco Instruments. These will be replaced by Analog Devices, ASML, Atmel, Freescale Semiconductor, LSI, Microchip Technology, Maxim Integrated Products, ON Semiconductor, Qualcomm and Skyworks Solutions.
The changes are the result of an annual review and reclassification of the index by Nasdaq OMX. The securities earmarked for removal have been surpassed in market capitalisation by their successors or have failed to meet the eligibility criteria.
These criteria are as follows. First, a security must be listed on the Nasdaq stock market and be classified as a company whose primary business is involved in the design, distribution, manufacture and sale of semiconductors as per the Industry Classification Benchmark. Next, it must have a minimum market capitalisation of at least $100 million and have traded at least 1.5 million shares in each of the last six months. Finally, the 30 largest securities by market capitalisation that meet these criteria are included in the index.
The 30 constituents are then subject to a modified market capitalisation weighting methodology. At each quarter, the index is rebalanced such that the maximum weight of any index security does not exceed 8% and no more than 5 securities are at that cap. The excess weight of any capped security is distributed proportionally across the remaining securities. If after redistribution, any of the 5 highest ranked securities are weighted below 8%, these securities are not capped. Then, any remaining securities in excess of 4% are capped at 4% and the excess weight is redistributed proportionally across the remaining securities. The process is repeated, if necessary, to derive the final weights.
Naturally, the changes only affect funds linked to the PHLX Semiconductor Sector Index. The Market Vectors Semiconductor ETF (SMH), the largest semiconductor ETF with almost $320 million in assets, remains unchanged, as do semiconductor ETFs offered by SPDR, PowerShares and ProShares.