Semiconductor ETFs Looking At Another Banner Year

Chip demand getting a boost from smartphones and autos, as well as other areas.

Reviewed by: Todd Rosenbluth
Edited by: Todd Rosenbluth

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.



The VanEck Vectors Semiconductor (SMH) has $530 million in assets, but trades 2.5 million shares on a daily basis. While subindustry exposure is similar to the SOXX index, exposure to Taiwan is much greater, with CFRA buy-recommended Taiwan Semiconductor Manufacturing as the largest holding. SMH has a 0.35% net expense ratio. Both SOXX and SMH have hefty weightings in large-cap stocks.

The SPDR S&P Semiconductor (XSD) has $300 million in assets and trades 125,000 shares on a daily basis. Unlike SOXX and SMH, XSD only holds semiconductor stocks and is equally weighted. As such, midcaps such as CFRA buy-recommended Monolithic Power Systems is of similar size in the portfolio as Texas Instruments. The ETF has a 0.35% net expense ratio.

The PowerShares Dynamic Semiconductors Portfolio (PSI) has $133 million in assets and trades 50,000 shares on a daily basis. Unlike the three of other ETFs whose holdings are relatively static, PSI tracks an index based on value, quality and momentum characteristics; the index of 30 stocks is rebalanced and reconstituted quarterly. ADI and AVGO are two of the ETF’s semiconductor holdings, but the PSI recently had more exposure to semi equipment stocks than its peers.

In the past year, PSI has been the strongest performer, rising 60%. However, CFRA looks at ETFs in part as a basket of securities. We have rankings on more than 950 equity ETFs, based on a combination of holdings-level analysis, technical trends and cost factors.

At the time of writing, neither the author nor his firm held any of the securities mentioned. Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence's equity and fund business in October 2016. He can be reached at [email protected]. Follow him at @ToddCFRA


Todd Rosenbluth is director of ETF and mutual fund research at CFRA, an independent research firm that acquired S&P Global Market Intelligence’s equity and fund business in October 2016. Follow him at @ToddCFRA.