Semiconductor ETFs Riding High on Holiday Optimism - ETF News And Commentary

The worst sell-off in semiconductor stocks seen in early October was unable to steal the sheen off the space. 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 was more pronounced in recent weeks courtesy of optimism over the holiday season and a strengthening U.S. economy (see:

).

Capacity utilization, advanced technologies, smartphone upgrades, and new gadgets are fueling demand for chips and other semiconductor products. The PC market is also stabilizing and will likely see accelerated growth in the coming months thanks to the replacement of older devices and upgrades from Windows X.

The global semiconductor sales picked up 9.6% year over year to $29.7 billion in October, and sustained the pace for the highest-ever sales this year. As per the

, global semiconductor sales will likely grow nearly double digits for the full year, followed by moderate growth of 3.4% for 2015 and 3.1% for 2016.

The strong holiday mood has pushed the Philadelphia Semiconductor Index to the highest level since 2001 early this week. In particular, most chipmakers such as Intel (

), Micron Technology (

), Analog Devices (

), Texas Instruments (

) and Avago Technologies (

) surged to the highest level not seen in more than a decade (read:

).

The upside to this industry is further confirmed by the Zacks Industry Rank as two-thirds of semiconductor industries actually have a solid Rank at the time of writing. Radiofrequency, prologic devices, and memory have a Zacks Rank in the top 15% while other segments like communications, general, graphical, and electric computer have ranks in the top 43%. This suggests strong future growth and smooth trading in this corner of the technology world heading into the New Year.

Given impressive performances and an optimistic outlook, investors seeking to ride out the surging space in a diversified way could consider the following ETFs. Any of these funds could make for a compelling choice as these surged to new record highs early in the week and could rise further in the days ahead.

This ETF follows the PHLX Semiconductor Sector Index and offers exposure to 32 domestic firms. It is highly concentrated on the top five firms as these collectively make up for two-fifths share in the basket. Further, about two-thirds of the portfolio is dominated by large cap stocks while mid caps take the remainder with just 5% going to small caps.

The fund has amassed $632.7 million in its asset base and trades in good average volume of roughly 263,000 shares a day. The product charges 47 bps in fees a year from investors and has gained about 29% in the year-to-date time frame. The ETF hit an all-time high of $96.03 and has a Zacks Rank of 3 or ‘Hold' rating with a High risk outlook.

This fund provides exposure to 26 securities by tracking the Market Vectors US Listed Semiconductor 25 Index. Of these, two firms – Intel and Taiwan Semiconductor Manufacturing (

) – dominate the fund's return with a combined share of 35.8% while other firms do not hold more than 5.33% of assets. From a market cap look, the product focuses on large cap stocks, as these account for three-fourth of the portfolio.

The product manages assets worth $406.6 million and charges 35 bps in annual fees and expenses. It is heavily traded with a volume of around 2.6 million shares per day and has added 29.7% so far in the year. While SMH touched its multi-year high of $56.64, it is still trading 46% below the all-time high reached in mid-2000, suggesting enough room for upside. As such, it has a Zacks ETF Rank of 2 or ‘Buy' rating with a High risk outlook (read:

).

This fund tracks the S&P Semiconductor Select Industry Index, holding 49 stocks in its portfolio. It is widely spread across each security as none of these allocates more than 3.11% of the assets. The product has a definite tilt toward small cap stocks at 58%, followed by 26% in mid caps and 15% in large caps.

The fund is less popular and illiquid with AUM of $169.7 million and average daily volume of roughly 102,000 shares. It charges 35 bps in fees per year and is up 27.8% this year. XSD also hit a fresh all-time high of $79.41 and has a Zacks ETF Rank of 3 with a High risk outlook.

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in the basket with a diversified exposure to various market caps and a number of securities. About 55% goes to small caps, 24% to large caps and the rest to mid caps. Additionally, none of the firms account for more than 5.03% of assets (read:

).

The product, with AUM of $31 million is often overlooked by investors and hence sees a lower average daily volume of 20,000 shares. Expense ratio came in at 0.63%. PSI is the top performing fund in the semiconductor space, having gained about 33% in the year-to-date time frame. The ETF hit an all-time high of $25.57 and has a Zacks ETF Rank of 3 with a High risk outlook.

With strong demand for semiconductor products and a strong revival in the economy, the ETF will continue its winning streak in the coming months. As a result, investors could make huge profits by investing in this corner of the broad market with these ETFs, especially at the height of holiday cheer.

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