The semiconductor industry’s remarkable recovery continues on soaring demand, stemming from advancements in artificial intelligence (AI) technologies, enhanced data processing needs, and a resurgence in electronics manufacturing.

The semiconductor industry has also benefited from the Federal Reserve’s monetary easing policy that saw the central bank cut interest rates for the second time in a row on Thursday. Investing in semiconductor funds like DWS Science and Technology A (KTCAX Quick QuoteKTCAX - Free Report) , Fidelity Advisor Semiconductors Fund Class I (FELIX Quick QuoteFELIX - Free Report) and Fidelity Select Semiconductors Portfolio (FSELX Quick QuoteFSELX - Free Report) thus appears to be a prudent choice.

Chip Sales Rebound on Surging Demand

On Tuesday, the Semiconductor Industry Association reported that global semiconductor sales reached $166 billion in the third quarter, reflecting a rise of 23.3% year over year and 10.7% from the previous quarter.  Month over month, sales climbed 4.1% to $55.3 billion in September.

September also witnessed the highest quarter-over-quarter semiconductor sales growth since 2016. Growing interest in AI, especially generative AI, continues to boost semiconductor demand. The solid performance by tech stocks, which has been responsible for this year’s broader rally, is largely being driven by NVIDIA, which has emerged as the market leader in generative AI, igniting widespread interest and advancements.

Semiconductor Sector to Grow on AI Demand

Experts believe AI has vast untapped potential, with a lot still unexplored. The growing enthusiasm around AI will drive even more demand as several semiconductor manufacturers venture into the AI market. AI-focused chips are becoming essential as their use expands across diverse sectors, from high-performance computing to everyday consumer electronics.

Also, memory components like NAND flash and DRAM are experiencing a resurgence in demand, addressing specialized computing requirements and supporting AI-intensive tasks. According to a report from Gartner, global semiconductor revenues are projected to reach $630 billion in 2024, reflecting a 19% year-over-year increase. NAND flash, which plays a key role in AI systems, is forecasted to see a robust 12% revenue rise by 2025, fueled by the ongoing supply shortage and rising demand for AI applications.

Moreover, the Federal Reserve announced a 25-basis point rate cut on Wednesday at the end of its November policy meeting. The Federal Reserve had earlier cut interest rates by 50 basis points in September as inflation continued to decline.

This takes the current benchmark policy rate to the range of 4.50% and 4.75%. Lower interest rates generally favor growth assets, as they decrease the opportunity cost of holding non-yielding assets, such as technology and semiconductor stocks.

3 Semiconductor Funds With Upside

We have, thus, selected three mutual funds with significant exposure to semiconductor producers carrying a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) that are poised to gain from such factors. Moreover, these funds have encouraging three- and five-year returns. Additionally, the minimum initial investment is within $5000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

The question here is: why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Mutual Funds: Advantages, Disadvantages, and How They Make Investors Money).

DWS Science and Technology A fund seeks growth of capital. Under normal circumstances, KTCAX invests at least 80% of net assets in common stocks of U.S. companies in the technology sector.

DWS Science and Technology A fund has a track of positive total returns for over 10 years. Specifically, KTCAX’s returns over the three and five-year benchmarks are 11.9% and 21.4%, respectively. KTCAX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.87%, which is lower than its category average of 1.02%

To see how this fund performed compared to its category and other #1 or 2 Ranked Mutual Funds, please click here.

Fidelity Advisor Semiconductors Fund Class I fund seeks capital appreciation. FELIX invests primarily in common stocks. Fidelity Advisor Semiconductors Fund Class I normally invests at least 80% of assets in securities of companies principally engaged in the design, manufacture, or sale of electronic components; equipment vendors to electronic component manufacturers; electronic component distributors; and electronic instruments and electronic systems vendors. 

Fidelity Advisor Semiconductors Fund Class I fund has a track of positive total returns for over 10 years. Specifically, FELIX’s returns over the three and five-year benchmarks are 26.5% and 34%, respectively. FELIX has a Zacks Mutual Fund Rank #2 and an annual expense ratio of 0.73%, which is lower than its category average of 1.01%.

To see how this fund performed compared to its category, and other #1 or 2 Ranked Mutual Funds, please click here.

Fidelity Select Semiconductors Portfolio fund seeks capital appreciation. FSELX normally invests at least 80% of its assets in common stocks of companies principally engaged in the design, manufacture, or sale of electronic components (semiconductors, connectors, printed circuit boards and other components); equipment vendors to electronic component manufacturers; electronic component distributors; and electronic instruments and electronic systems vendors.

Fidelity Select Semiconductors Portfolio fund has a track of positive total returns for over 10 years. Specifically, FSELX’s returns over the three and five-year benchmarks are 28.2% and 35.2%, respectively. FSELX has a Zacks Mutual Fund Rank #1 and an annual expense ratio of 0.67, which is lower than its category average of 1.25%.

To see how this fund performed compared to its category and other #1 or 2 Ranked Mutual Funds, please click here.

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