Quick Investor Guide To Semiconductor Industry ETFs

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. The computing market will decline this year and will remain in the doldrums for a couple more years. This softness will be more than made up by growth in mobile devices, particularly tablets and smartphones. 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, consumer electronics driving sales this year include tablets, smartphones, notebooks, network-enabled TVs, digital imaging and set top boxes. However other areas will remain soft, so the overall market will not grow more than 2.7% this year. (Read: Time to buy this top ranked Semiconductor ETF)

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.
Semiconductor demand may be expected to pick up this year, as most OEMs and their channel partners have been reducing inventories and cutting utilization. PC and microprocessor inventory reduction has been significant, but should pick up this year, driven by new product launches. Handset inventory declines were significant exiting 2012, driven by strong demand. Analog, discrete and storage inventories were all pretty lean, according to research firm iSuppli.

Forecast for 2013

According to World Semiconductor Trade Statistics (WSTS) data, there should be worldwide semiconductor sales growth of 4.5% in 2013, following the 3.2% decline in 2012. Gartner and IC Insights are close to this, with projections at 4.5% and 6.0%, respectively. iSuppli and IDC are more optimistic, predicting sales growth of 8.2% and 6.9%, respectively.

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 Exchange Traded Funds (ETFs) that are more heavily weighted to these big players.

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 1.73%. Net assets on Aug 31 2013 were $279.11 million.

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