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Semiconductor ETFs on Roller Coaster Ride after Earnings Beat

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Earnings for the technology sector seem to be shaping up well this season, propelled by the semiconductors. Total earnings for 69.1% of the sector’s total market capitalization that have reported so far are up 11.8% on 6.9% revenue growth. This represents the best growth in recent quarters.

About 63% of the earnings growth has come from semiconductor electronics with 100% earnings beat, followed by 10.6% growth in miscellaneous technology. In addition, the semiconductor corner of the broad technology space has become the darling of investors this year and most of the stocks in the space are flying high thanks to the Internet and social media meltdown as well as encouraging industry fundamentals.

In particular, higher-than-expected earnings from some well-known names such as Intel (INTC - Free Report) , Micron Technology (MU - Free Report) , Broadcom and Texas Instruments (TXN - Free Report) have fueled optimism in the semiconductor space. Further, the industry has a solid Zacks Industry Rank at the time of writing, suggesting smooth trading for the space in the coming months (read: Enjoy the Semiconductor Stock Rally with this Top Ranked ETF).

Semiconductor Earnings in Focus

Intel, the world’s largest chipmaker, has been the major gainer in the industry as the stock climbed nearly 8% since its earnings announcement on July 15 after the closing bell and hit a 12-year high of $34.83 last week. The company topped the Zacks Consensus Estimate by 3 cents on earnings and $209 million on revenues thanks to strong demand in its core server and PC markets. Further, the company projects revenues in the range of $13.9–-$$14.9 billion, up 4.1% sequentially and 6.8% year over year.

Shares of the memory chipmaker, MU, rose over 8% since it reported third quarter fiscal 2014 earnings on June 23. This is because earnings per share of 79 cents and revenues of $3.98 billion comfortably beat the Zacks Consensus Estimate of 71 cents per share and revenue estimate of $3.88 billion. Additionally, the company issued fourth quarter revenue guidance of $4.0–4.2 billion.

Broadcom also surprised the market in its latest earnings release on July 22 after the bell with its earnings per share of 65 cents on $2.04 billion in revenues that strongly outpaced our earnings estimate of 42 cents and revenue estimate of $2.05 billion. BRCM shares reached a new 52-week high of $40.74 on solid results but fell over 1% post earnings to date (read: Broadcom A Rising Star: 2 ETFs to Pick).

TXN reported earnings of 62 cents surpassing our estimate by 3 cents. Revenues of $3.29 billion were also above the Zacks Consensus Estimate of $3.26. Additionally, the company provided an upbeat guidance for the third quarter. Earnings per share are expected in the range of 66–76 cents while revenues will likely be between $3.31 billion and $3.59 billion. Despite the strong results and encouraging outlook, TXN shares have lost about 5% to date post its earnings announcement on July 21.

ETFs in Focus

The impressive performances and bright industry outlook put semiconductor ETFs in focus for the next few days. Investors seeking to ride out the surging space in a diversified way could consider the following three ETFs.

iShares PHLX Semiconductor ETF ((SOXX - Free Report) )

This ETF follows the PHLX Semiconductor Sector Index and offers exposure to 31 domestic firms. It is highly concentrated on the top five firms with heavy allocations to INTC, MU and TXN that make up for a combined one-fourth share. Further, about two-thirds of the portfolio is dominated by large cap stocks while mid cap takes the remainder with just 4% going to small caps.

The fund has amassed $498.6 million in its asset base and trades in average volume of roughly 162,000 shares a day. The product charges 47 bps in fees a year from investors and lost over 4% last week (see: all the Technology ETFs here).

Market Vectors Semiconductor ETF ((SMH - Free Report) )

This is easily the most popular and liquid ETF in the semiconductor space with AUM of about $402 million and average daily volume of more than 1.6 million shares. The fund provides exposure to 26 securities by tracking the Market Vectors US Listed Semiconductor 25 Index. Of these, the two firms - Intel and Taiwan Semiconductor Manufacturing (TSM) – dominate the fund’s return with combined 36.3% of total assets.

From a market cap look, the product focuses more on large cap stocks, as these account for three-fourth of the portfolio. While U.S. firms dominate the fund’s holdings at 70.8% of assets, Taiwan (16.2%), the Netherlands (8.7%) and United Kingdom (4.4%) take the remainder portion. Expense ratio is the lowest at 35 bps when compared to other semiconductor products in the space. SMH is down 2.7% in the past five trading sessions.

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

This fund tracks the S&P Semiconductor Select Industry Index, holding 50 stocks in its portfolio. It is widely spread across each security as none of these allocates more than 2.8% of the assets. The product has a definite tilt toward small cap stocks at 59%, followed by 27% in mid caps and 14% in large caps.

The fund is less popular and illiquid with AUM of $164.3 million and average daily volume of less than 86,000 shares. It charges 35 bps in fees per year and lost nearly 5.7% last week (read: 2 Hot Summer ETFs Surging to #1 Ranks).

Bottom Line

Though these products were on a wild ride last week, these could make for a compelling buying opportunity for investors seeking to tap the beaten down prices in the wake of an earnings beat, improving PC market, and rising global industry sales. This is especially true, as the trio returned nearly 16% in the year-to-date time frame, crushing the broad tech fund (XLK) and broad market fund (SPY) by wide margins.

Further, the above-mentioned funds have a top Zacks ETF Rank of 1 or ‘Strong Buy’ suggesting their outperformance in the coming months.

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