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6 Solid Reasons Why You Should Buy Semiconductor ETFs

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The semiconductor space remained largely unaffected by the broad market sell-off seen in early February. This is because the semiconductor industry is clearly leading the broad technology space this year on encouraging fundamentals, solid corporate earnings, strong outlook and investors’ continued appreciation of value-centric traditional stocks. The rally has strengthened courtesy of a series of consolidation, which pushed several chip stocks and ETFs to new highs.

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

Hot Trends

Semiconductors  are the most important driver of overall technology growth as these are used in cars, electronic gadgets to planes and weapons. Robust demand for memory chips and other semiconductor products owing to the rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, and other advanced information technologies are fueling huge growth in the space (read: How to Invest in the Hottest Technologies With ETFs).

Additionally, the deployment of 5G (fifth-generation) technology – the next wireless revolution - will likely create further growth opportunities.

Encouraging Fundamentals

The twin tailwinds of Trump’s tax reform plan and a rising interest rate scenario are also pushing chip stocks higher. This is because companies like Qualcomm (QCOM - Free Report) , Intel (INTC - Free Report) , and NVIDIA (NVDA - Free Report) hoard huge cash overseas and are poised to benefit the most from the reduced tax rates. Additionally, most of the chipmakers are sitting on a huge cash pile and are in a position to increase shareholder payouts. The cash reserves will ensure that these companies are not plagued by financial trouble in a rising interest rate environment (read: 5 ETF Ways to Tap Hot Semiconductor Stocks).

Adding to the strength is a pickup in the economy and better job prospects that are giving a solid boost to economically sensitive growth sectors like technology, which typically performs well in a maturing economic cycle.

Consolidation

The semiconductor space has been witnessing an increase in mergers and acquisitions talks. The latest development is that Intel might launch an offer to acquire Broadcom (AVGO - Free Report) , which was running after Qualcomm for months and now Trump has blocked its $117 billion bid due to national security concerns. Meanwhile, Qualcomm is trying to close its $47 billion acquisition of NXP Semiconductors NXPI, which was announced in October 2016 (read: Broadcom Launches Bid for Qualcomm: Semiconductor ETFs Surge).

Marvell Technology Group (MRVL - Free Report) is also in the process of acquiring smaller rival Cavium Inc. CAVM.O for about $6 billion. The transaction is expected to be completed by mid-2018. Microchip Technology (MCHP - Free Report) also announced to buy Microsemi Corp for $8.35 billion early this month. The deal is expected to close in the second quarter of 2018.

Strong Outlook

After generating record annual sales in 2017, the global semiconductor industry  begun 2018 on a strong note, posting its highest-ever January sales and 18th consecutive month of year-over-year sales increase, according to the World Semiconductor Trade Statistics (WSTS). The agency expects global semiconductor revenues to rise 7% year over year in 2018.

Per Gartner, worldwide semiconductor revenues are expected to grow 7.5% to $451 billion this year buoyed by higher prices for both DRAM and NAND flash memory.

Impressive Earnings

Per the latest Earnings Trends report, earnings growth for the broad technology sector turned out to be very strong, with total Q4 earnings up 23.7% on 11.1% higher revenues. Semiconductors have contributed the most with 68.8% earnings growth, followed by 51.1% growth in miscellaneous technology (see: all the Technology ETFs here).

Cheap Valuation

Per a MarketWatch article, semiconductors, as a group, are still cheaper than the S&P 500. The PHLX Semiconductor Index is now trading at 16.1 times the consensus earnings estimates for the next 12 months, while the S&P 500 is trading at 17 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 firms with heavy concentration on the top five firms accounting for a combined 38.3% share. It has amassed $1.6 billion in its asset base and trades in a solid average volume of around 589,000 shares a day. The fund charges 48 bps in fees a year from investors and has a Zacks ETF Rank #1 (read: 4 Sector ETFs That Crushed S&P 500 in 9-Year Bull Run).

VanEck Vectors Semiconductor ETF (SMH - Free Report)

This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. It is concentrated on the top two firms with double-digit exposure each. The product has managed assets worth $1.3 billion and charges 35 bps in annual fees and expenses. It is heavily traded with a volume of more than 4.5 million shares per day and has Zacks ETF Rank #2.

PowerShares Dynamic Semiconductors Fund (PSI - Free Report)

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in its basket, with each accounting for less than 6.1% of the assets. The product has AUM of $372.1 million and sees moderate average daily volume of 101,000 shares. Expense ratio comes in at 0.63%. PSI has a Zacks ETF Rank #1.

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 is widely spread across a number of securities, with none holding more than 3.77% share. The fund has AUM of $334.7 million and an average daily volume of about 119,000 shares. It charges 35 bps in fees per year and has a Zacks ETF Rank #1.

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 30 stocks in its basket, it has diverse exposure across components with each holding less than 9.6% of the assets. FTXL has accumulated $404.4 million in AUM while average trading volume is light at around 13,000 shares. It charges 0.60% in expense ratio and has a Zacks ETF Rank #1 (read: 5 Best ETF Charts of Q4 Earnings).

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