The once-soaring semiconductor space hit the wall this year in late March after Nvidia (NVDA - Free Report) , one of the best-performing semiconductor stocks in the S&P 500 over the past year, tumbled upon suspension of self-driving car tests on public roads (read: Should You Snap Up Downtrodden Semiconductor ETFs Now?).
The slump in the cryptocurrency market also played its role in pushing chip stocks down. Mining of cryptocurrencies needs the usage of semiconductors. Since bitcoin is down about 35.3% this year, semiconductors understandably fell flat.
Overall, SOXX is up 6.3% in the year-to-date frame (as of May 14, 2018), still beating the broader market fund SPDR S&P 500 ETF (SPY) (up 1.6%) but falling short of XLK (up 7.9%).
However, the space has recoiled lately on a host of factors. Below we highlight these to explain why semiconductor ETFs have the ability to reproduce last year’s superb returns this year as well. Notably, semiconductors belong to a top-ranked (top 6%) Zacks industry.
Easing Trade Tensions between United States and China
NXP Semiconductors stock gained about 11.9% on May 14 as investors took the President Donald Trump’s apparent peacemaking tweet about trade with China as an increased likelihood to an approval from Chinese officials of Qualcomm's offer to buy NXP.
Chinese regulators have resumed their review of Qualcomm Inc.’s bid to acquire NXP Semiconductors NV, per Bloomberg. The proposal was earlier feared to die a quick death due to the political crisis between China and the United States (read: US-China Trade Tensions Ease: ETFs to Benefit).
Upbeat Sales Fundamentals
After generating record annual sales in 2017, the global semiconductor industry was off to a great 2018. Per the Semiconductor Industry Association (SIA), global sales of semiconductors grew 20% year over year to $111.1 billion in the first quarter of 2018.
Sales in March were 20% higher year over year and up 0.7% sequentially. March witnessed the 20th successive month in sales increase. All regional markets registered double-digit growth and all key semiconductor product categories posted year-over-year expansion.
Strong Industry Backdrop
Maybe PC sales are not up to the mark and there is saturation in smartphone demand in the developed market, but that is not likely to hold back the demand profile of semiconductor stocks (read: 4 ETF Areas Under Watch on Waning Smartphone Demand).
The rapid adoption of advanced information technologies including cloud, Internet of Things, autonomous cars, gaming, wearables, drones and artificial intelligence should keep on fueling semiconductor ETFs.
Overall, the technology sector is expected to produce 28.6% earnings growth in Q1. Among all the tech sector industries, semiconductors top the growth rate (up 62.5%), per the Earnings Trends issued on May 9, 2018 (read: Nvidia Tops Estimates: ETFs in Focus).
Tax Reform Benefit
Trump’s tax reform is another tailwind for the space. Big semiconductor companies have huge cash piles overseas and are likely to bring that cash back thanks to the one-time repatriation tax and an overall lower tax rate. After repatriation, this cash may be used to dole out dividends to shareholders and used to buy back shares (read: Tax Bill: What ETF Investors Need to Know).
ETFs in Focus
Against this backdrop, investors can definitely play the recent rebound in semiconductor ETFs. Below we highlight a few ETFs that staged a nice recoil on May 14.
Direxion Semiconductor Bull 3X (SOXL - Free Report) – Up 3.94%
ProShares Ultra Semiconductors (USD - Free Report) – Up 2.02%
Semiconductor Vaneck ETF (SMH - Free Report) – Up 1.74%
PowerShares Dynamic Semiconductors Portfolio (PSI - Free Report) – Up 1.64%
SPDR S&P Semiconductor (XSD - Free Report) – Up 1.33%
iShares PHLX Semiconductor ETF (SOXX - Free Report) – Up 1.22%
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