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Quick Investor Guide To Semiconductor ETFs

March 9th, 2014

semiconductorThe Semiconductor Industry serves as a driver, enabler and indicator of technological progress. As environmental issues have become more of a concern today, semiconductor devices are being made to reduce power consumption, reduce heat dissipation, capture solar energy, create more efficient lighting solutions and so forth.

Manufacturing operations have shifted to Asia over the past decade, but since innovation remains largely within the country, the sector is one of the biggest employers of labor, with a corresponding significant impact on the overall economy.

The consumer and computing markets consume two-thirds of all semiconductors, which are increasing convergence between these two markets such that it is getting more difficult to identify which devices are computing and which consumer.

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PC market growth will be moderate in the next few years, more than made up by growth in mobile devices. Semiconductors for mobile devices have their own set of unique challenges: greater functionality and better experience at higher speeds and consuming less power. They also have to be priced lower. Additionally, a lot of the growth in the next few years will come from price-sensitive emerging markets, which is likely to pressure margins.

According to the CEA, tablets and smartphones will be the strongest drivers of consumer electronics sales this year, with smart watches and HD TVs also growing strongly off a very small base. With overall global spending on technology declining 1% this year, spending on consumer electronics is not expected to be more than 2.4%. (Read: Solid Tesla Earnings Put these ETFs in Focus)

The move to cloud computing and growing data consumption on mobile devices is leading to strong demand for suitable wireless and computing networks. This is currently one of the most important semiconductor markets. Industrial automation, automotive, aerospace and defense are also consuming a growing number of semiconductors, but growth prospects in these markets are currently not as good.

Forecast for 2014

According to World Semiconductor Trade Statistics (WSTS) data, there should be positive worldwide semiconductor sales growth of 4.1% in 2014, followed by 3.4% growth in 2015. All products and categories are expected to grow in both years, although wireless and automotive are expected to grow the strongest and consumer and computing relatively stable. (Read:Facebook to buy WhatsApp, 3 ETFs to watch)

Playing the Sector Through ETFs

The ongoing transition across multiple served markets makes it difficult to select winning semiconductor stocks. However, companies in charge of core manufacturing generally gain whenever there is market growth. As a result, it could be easier to play the sector through ETFs that are more heavily weighted to these big players.(See all technology ETFs here)

For those interested in taking a non-equity look at semiconductors, we have highlighted a few ETFs tracking the industry below, any of which could be interesting picks:

Van Eck Market Vectors Semiconductor ETF (SMH)

The Van Eck Market Vectors Semiconductor ETF was started in 1955 to replicate the price and yield performance of the Market Vectors U.S. Listed Semiconductor 25 Index.

This Index tracks the overall performance of 25 of the largest U.S. listed, publicly-traded semiconductor companies. Some of the largest holdings include Intel Corp (INTC), Taiwan Semiconductor Manufacturing Company (TSM) and Texas Instruments(TXN). Its expense ratio is 0.35% and its dividend yields 1.59%.

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NYSE:PSI, NYSE:SMH, NYSE:XSD


 

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