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Why Semiconductor ETFs Are Hitting Highs

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The semiconductor segment appears to be the bright star in the broader technology space with Technology Select Sector SPDR ETF (XLK - Free Report) returning about 5.8% so far this year (as of July 18, 2016) and VanEck Vectors Semiconductor ETF (SMH - Free Report) offering a staggering 15.3%.

The semiconductor space had a tough time in 2015 thanks to the struggling PC market. However, 2016 has been great for the segment. Not only this, semiconductor ETFs lately hit 52-week highs. We’ll tell you why (read: Will Semiconductor ETFs See a Brighter 2016?).

Inside the Optimism

Semiconductor is the value-centric traditional tech area. As 1H16 was tangled in a web of global growth issues and risk-off trade sentiments, equity segments that offer more value had an advantage. Needless to say, semiconductors cashed in on the trend. 

Also, value-oriented trading should be in focus for the rest of the year thanks to the uncertainty over the Fed policy stance, presidential election in November and the Brexit fallout. All these should keep value segments like semiconductors alive.

Expectations of decent earnings from many industry bellwethersmay have boosted the space lately. Qualcomm Inc (QCOM - Free Report) has a Zacks Rank #2 (Buy) and an Earnings ESP of 3.61%, at the time of writing.

Our proven model does not conclusively show that Qualcomm is likely to beat on earnings since a stock needs to have both a positive Earnings ESP and a Zacks Rank of #1, 2 or 3 for an earnings beat. Intel Corp (INTC - Free Report) has a Zacks Rank #2 and an Earnings ESP of 3.77% though Texas Instruments Inc. (TXN - Free Report) has a Zacks Rank #4 (Sell) with an Earnings ESP of 1.39% (read: Can Earnings Pull Out Semiconductor ETFs from Tech Slide?).

Also, this tech sub-sector might see gains ahead on demand for its products in emerging technology applications like tablets and smartphones despite still-subdued PC shipments. Moreover, the semiconductor space is consolidating rapidly with a number of deals announced lately.

The sector is hovering in the top 18% region of the Zacks Industry Rank. In the light of such developments, two ETFs namely SMH and SPDR S&P Semiconductor ETF (XSD - Free Report) hit a 52-week high on July 18 (see all technology ETFs here).

Will the Rally Last?

As of now, earnings and valuation will decide on how the semiconductor space will behave ahead. The overall dynamics of the space is yet to recover. The World Semiconductor Trade Statistics (WSTS) predicts that the global semiconductor market will decline 2.4% year over year in 2016, before entering into the growth territory in 2017 and 2018.

Optoelectronics, Sensors, and Analog ICs are still good areas in the broader semiconductor space, as per WSTS. So, it may be a good area for long-term investors as the worst seems to be over and the segment will likely turn around soon. Over the short term, stellar earnings can keep it afloat.

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