Semiconductor ETFs Looking At Another Banner Year

January 11, 2017

The technology sector outperformed the S&P 1500 Index in 2016, driven in part by the strength of semiconductor and semi equipment industry.

While software and internet stocks lagged the broader market, semiconductors (up 26%) and semiconductor equipment (42%) were among the sector’s bright spots. CFRA remains bullish on many semi securities, which helps support our view on a variety of related ETFs.

Angelo Zino, CFRA technology equity analyst, expects a normalized inventory supply chain in 2017, with sales driven in part by an acceleration of growth within the smartphone category. He projects significant new features to the next-generation iPhone spurring robust demand in the wireless category. Broadcom and Semtech are two stocks that Zino thinks are attractive and can be beneficiaries.

In addition, Zino thinks semiconductors related to automotive and industrials should continue to benefit from more content per vehicle as consumers look to purchase cars that have more features on the dashboard and more wireless capabilities. Analog Devices and ON Semiconductor are two stocks CFRA views as positioned to climb higher due to this trend.

Moderately Higher Spending

CFRA expects stable to moderately higher semiconductor spending levels for 2017 and 2018 as we see chipmaker capital expenditures highly correlated to revenue. Zino believes Lam Research remains among the best-positioned to take advantage of important technology transitions, such as multipatterning, finFET and 3D NAND capacity expansion.

CFRA has STARS rankings on 64 global semiconductor and semiconductor equipment stocks, with 30 of them Strong Buy or Buy recommendations.

Semiconductors and semi equipment are among the larger industries in well-diversified technology ETFs, such as Technology Select Sector SPDR (XLK) and Vanguard Information Technology Index Fund (VGT). But software and IT services stocks are more represented. Investors seeking more direct exposure should focus on an industry ETF. Below are ETFs to consider.

Semiconductor ETFs To Consider

The iShares PHLX Semiconductor ETF (SOXX) has $660 million in assets. Exposure is primarily in semiconductor stocks (87% of assets), while semiconductor equipment stocks (13%) like Applied Materials (AMAT) are much less represented. In addition to U.S. stocks, the ETF has exposure to companies based in Singapore and Taiwan, The ETF trades on average 515,000 shares on a daily basis and has a 0.48% net expense ratio.



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