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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Philadelphia Semiconductor Index (SOX)

What it is:

The Philadelphia 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.

How it works (Example):

Because it tracks the cyclical semiconductor industry, it has been a very volatile over the years.

The Semiconductor Index is comprised of 19 stocks that almost fully represent the semiconductor industry. The index includes firms that manufacture semiconductors and some 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.

Why it Matters:

The Philadelphia 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.

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 very diverse.