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5 Reasons to Buy Semiconductor ETFs

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The technology sector currently became the most "crowded trade" of all time, per the Bank of America’s latest global fund manager survey. Too many investors have piled into U.S. technology stocks. While most of the segments under technology seem attractive after the latest market rout, semiconductor is expected to outperform for the rest of this year (read: Should You Invest in Tech ETFs After a Sharp Sell-Off?).

Below we discuss some strong reasons for investing in semiconductor sector.

Solid Industry Trends

Chip stocks have shown strong resilience amid the coronavirus pandemic on the stay-at-home trend, which has bolstered the demand for gaming chips and data center business. The rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, 5G and other advanced information technologies will continue to fuel growth.

Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life from cars, electronic gadgets to planes and weapons. Chipmakers power much of the world’s technology with their new innovations and have set the stage for digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail among others.

Based on the most-recent quarterly results available through Sep 14, two-thirds of the semiconductor group showed increases in revenues from a year earlier, according to a Marketwatch article.

M&A Activities

The semiconductor space has been witnessing mergers and acquisitions. The latest development is that Nvidia (NVDA - Free Report) has agreed to acquire UK-based chip designer Arm Ltd. from Japan's SoftBank Group Corp. for as much as $40 billion after weeks of speculation. It will represent the biggest acquisition in the history of the semiconductor industry. The proposed acquisition will improve Nvidia’s competitive position against the likes of Intel (INTC - Free Report) and Advanced Micro Devices (AMD - Free Report) in the data-center chip market. Completion of the transaction is expected to take place in approximately 18 months (read: Nvidia's Buyout of Designer Arm Put These ETFs in Focus).

Meanwhile, chipmaker giant Analog Devices (ADI - Free Report) is also in the process of acquiring rival semiconductor Maxim Integrated Products (MXIM - Free Report) for $21 billion in an all-stock deal. The enterprise value of the transaction is $68 billion. The deal, which is expected to close in the summer of 2021, would create a competitor to Texas Instruments (TXN - Free Report) . It is aimed at boosting its market share in automotive and 5G chipmaking.

Strong Outlook

The global semiconductor industry has been showing momentum with worldwide semiconductor sales rising 4.9% in July after an increase of 5.1% in the second quarter, according to the Semiconductor Industry Association. The World Semiconductor Trade Statistics expects worldwide semiconductor market to grow 3.6% this year to $426 billion and then accelerate in 2021 with 6.2% growth.

Sector Rotation

Investors are rotating into cyclical sectors given the improving economy and the potential for a coronavirus vaccine. Additionally, super-easy monetary and fiscal policies will drive the cyclical stocks higher. As semiconductors are cyclical in nature, the rotation will drive the chip stocks higher (read: Don't Fear Correction: ETF Laggards Are Emerging Leaders).

Cheap Valuation

Per the Marketwatch article, semiconductors, as a group, are still cheaper than the S&P 500. The PHLX Semiconductor Index is now trading at nearly 19.8 times forward earnings estimates, while the S&P 500 is trading at 22.1 times the estimates.

ETFs to Tap

In view of the reasons discussed above, we strongly believe that investors should consider semiconductor ETFs. Below we have highlighted them. All these have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy):

iShares PHLX Semiconductor ETF (SOXX - Free Report)

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors. The fund has amassed $3.6 billion in its asset base and trades in solid average volume of around 582,000 shares a day. It charges 46 bps in fees a year from investors and has a Zacks ETF Rank #1 (read: Semiconductor ETF Hits a 52-Week High).

VanEck Vectors Semiconductor ETF (SMH - Free Report)

This fund provides exposure to 25 securities by tracking the MVIS US Listed Semiconductor 25 Index. The product has managed assets worth $2.6 billion and charges 35 bps in annual fees and expenses. It is heavily traded with a volume of around 2.8 million shares per day and has a Zacks ETF Rank #2.

SPDR S&P Semiconductor ETF (XSD - Free Report)

This fund tracks the S&P Semiconductor Select Industry Index, holding 36 stocks in its portfolio. It has amassed $521.8 million in its asset base while trades in average daily volume of about 52,000 shares. It charges 35 bps in fees per year and has a Zacks ETF Rank #1.

Invesco Dynamic Semiconductors ETF (PSI - Free Report)

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 32 securities in its basket. It has AUM of $260.4 million and sees moderate average daily volume of 29,000 shares. Expense ratio is 0.58%. PSI has a Zacks ETF Rank #1 (read: Beaten-Down ETFs to Buy After Market Rout).

First Trust Nasdaq Semiconductor ETF (FTXL - Free Report)

This fund offers exposure to the most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. Holding 31 stocks in its basket, FTXL has accumulated $46.2 million in AUM. Average trading volume is light at around 9,000 shares and expense ratio is 0.60%. FTXL has a Zacks ETF Rank #2.

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