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Semiconductor ETFs A Great Bet Now: Here's Why

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Semiconductor ETFs have been in the sweet spot thanks to surging demand for chips from manufacturers of everything from smartphones to cars, laptops, PCs, video games and data centers. The stay-at-home trend amid the coronavirus outbreak, which has bolstered the demand for gaming chips, cloud computing and data center business, has proven to be a boon for the semiconductors. Plus, robust M&A activities have aided the sector in recent times.

Global semiconductor industry sales jumped 29.2% year over year to $44.5 billion in June 2021, the Semiconductor Industry Association (“SIA”) reported on Aug 2 citing data compiled by the World Semiconductor Trade Statistics. Sales in June were 2.1% more than the May 2021 total of $43.6 billion. “Second-quarter semiconductor sales were up significantly compared to Q2 of last year, increasing across all major product categories and in every major regional market,” said John Neuffer, SIA president and CEO.

Factors That Could Be Fueling Demand Further

Goldman Sachs says that some semiconductor stocks will gain as electric vehicle demand heats up.The automotive sector has specifically advanced to include more electronic components in vehicles that rely on chips. Auto sales are poised to rebound in the near term thanks to the ebbing pandemic and growing vaccination. This has resulted in a sharp demand for chips, in fact, supply shortages.

IHS Markit expects global electric vehicle sales will likely expand 41% in 2020, with more growth in the cards through the decade. The recent rally in cryptocurrencies like bitcoin prices and the 5G rollout are the winning points. The accelerating speed of digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail has been making the future bright for semiconductors.

Additionally, robust recovery in smartphone sales is spurring demand for semiconductors. Global smartphone market grew 19% year over year in the second quarter. According to the forecast by Gartner, worldwide sales of smartphones will likely increase 11.4% year on year to 1.5 billion units in 2021. 5G Smartphones are likely to make up about 35% of total smartphone sales.

Gartner analyst Anshul Gupta indicated that the availability of the lower end 5G smartphones is likely to push up smartphone sales in 2021. Apple's iPhone 12 handsets should also prove beneficial for the sector. Growing business from emerging Chinese smartphone makers, Oppo, Vivo and Xiaomi are the other positives for the space.

Still-Compelling Valuation

VanEck Vectors Semiconductor ETF (SMH - Free Report) is up 23% versus 17.9% gains in the S&P 500. Even after such a rally, several semiconductor ETFs are cheaper than the Nasdaq 100 ETF Invesco QQQ (QQQ - Free Report) which has a P/E of 33.12X and the valuation of SMH is almost at par with QQQ.

ETFs in Focus

SPDR S&P Semiconductor ETF (XSD - Free Report) – P/E 23.36X

Invesco Dynamic Semiconductors ETF (PSI - Free Report) – P/E 27.94X

First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) – P/E31.75X

VanEck Vectors Semiconductor ETF (SMH - Free Report) – P/E 33.92X