Will Semiconductor ETFs See A Brighter 2016?
The semiconductor industry has been on a roller coaster ride in recent times. The space hogged investors’ attention in 2014 only to plunge the very next year. The struggling PC market took all the shine out of this segment. Two independent research firms – Gartner and International Data Corporation – validated the fact. As per Gartner, PC shipments in 2015 totaled 288.7 million units, marking an 8% decline from 2014. Meanwhile, according to IDC, PC shipments witnessed a decline that was “the largest in history ” breezing past the 9.8% drop registered in 2013. In fact, the fourth quarter of 2015 marked the fifth successive quarter of global PC shipment decline, pointing at soft holiday season sales and a shift in consumers’ PC purchase preference, per Gartner. Both firms agreed that the launch of Windows 10 in third-quarter 2015 had an insignificant impact on PC shipments during the all-important holiday season. This was because customers upgraded their existing PCs rather than buying new ones. Also, a strong greenback, higher inventories in the semiconductor and electronics supply chain are also held responsible for this decline, per the research agencies. What’s in Store in 2016? However, most research agencies expect things to improve in 2016. In any case, the wind is in favor of the broader technology sector. As a result, semiconductor, the value-centric traditional tech area should expand modestly this year, primarily in the second half. Value-oriented trading should be in focus this year thanks to a paradigm shift in global economy. Policy tightening in the U.S., an accommodative stance in most developed economies, and lack of clarity about China’s currency movements should keep value investing busy throughout this year. Secondly, IDC predicts that the take-up of Windows 10 by corporates is likely to pick up and consumer purchase will be steady by the second half of 2016. Also, attractive PCs at affordable prices, the need for higher security and improved performances will eventually drive consumers toward an upgrade. The World Semiconductor Trade Statistics (WSTS) predicts the global semiconductor market to grow 1.4% to $341 billion in 2016 and 3.1% to $352 billion in 2017. This explains that moderate optimism is prevailing around the area. All regions are expected to post positive growth in 2017 with the Americas leading the way. Also, this tech sub-sector might shoot up on the requirement of its products in emerging technology applications like tablets and smartphones despite subdued PC shipments. If this was not enough, the semiconductor space is consolidating rapidly with a number of deals announced lately. ETFs to Play The latest discussion definitely tells you to park your money in semiconductor ETFs, especially after a down year like 2015. At present, there are four regular semiconductor ETFs namely Market Vectors Semiconductor ETF (NYSEARCA: SMH ), iShares PHLX Semiconductor ETF (NASDAQ: SOXX ), SPDR S&P Semiconductor ETF (NYSEARCA: XSD ) and PowerShares Dynamic Semiconductors Fund (NYSEARCA: PSI ) . Why to Look Beyond SMH? Of these, only SMH has a Zacks ETF Rank #3 (Hold) while the other three have a Zacks ETF Rank #1 (Strong Buy). Investors should note that SMH has as much as 18.6% exposure in Intel Corp., the biggest weight of the basket. Though Intel has exposure in three other ETFs, the weight is not as much as it is for SMH. As a result, the recent underperformance by the Intel stock post earnings cast out SMH from the ‘Strong Buy’ league. Below, we highlight three other semiconductor ETFs in detail for the interested investors. SOXX in Focus This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 U.S. firms. The fund has amassed $409.3 million in its asset base. The product charges a higher fee of 48 bps a year from investors. Intel (NASDAQ: INTC ) takes the fourth spot at 7.8% of total assets. XSD in Focus This fund tracks the S&P Semiconductor Select Industry Index, holding 42 stocks in its portfolio. It is widely spread across a number of securities as none of these allocates more than 3.44% of the assets. The product has a definite tilt toward small cap stocks at 65% while the rest is evenly split between the other two market cap levels. The $196.7-million fund charges 35 bps in fees per year. PSI in Focus This fund tracks the Dynamic Semiconductor Intellidex Index, holding 29 U.S. securities in the basket. Intel makes up for 5.2% share in the basket and not in the top-three holdings. This $50.7-million ETF charges 63 bps in fees. Original Post