Worldwide, the semiconductor industry serves as the backbone for
technological advancement. The industry has also experienced
tremendous growth attributable to the torrid rise in demand for
semiconductor devices around the world.
Not only has the space been quickly growing, but it has
witnessed a transformation of sorts lately, as the companies
reshuffled operations with the intent to shift routine productions
to low-cost areas. This change led to the development of the Asian
market which is now into memory production and backend
operations.
However, the global financial meltdown in 2008 had a devastating
impact on the industry largely thanks to slowing growth prospects
and worries over consumer confidence. Globally, semiconductor
devices reported sales of $299.5 billion in 2011, growth of just
0.4% from 2010 levels and a far cry from the 2010 growth rate of
over 31%.
Meanwhile, the Semiconductor Industry Association (SIA) had
earlier projected growth of 6% for 2011, but in December, the
expectation was slashed to 1.3% while the actual was even less than
that.
Semiconductor Sector In Focus
Within the semiconductor industry, computing and consumer
electronics play a major role in the overall sector performance.
The two markets cumulatively contribute around 60% to the total
industry sales.
The Consumer Electronics Association anticipates global consumer
electronics sales to deliver a 5% rise this year, driven by
strength in the emerging Asia/Pacific countries (to grow 18%), the
Middle East and Africa (11%), Latin America (11%) and
Central/Eastern Europe (9%).
North America is expected to be flat, while both developed
Asia/Pacific countries and Western Europe are expected to decline.
The products that would drive growth are tablets (up 59%),
smartphones (22%), home audio (5%) and mobile PCs (3%).
Commoditization and pricing pressure in the computing market
have been big problems and continue to be issues but we are seeing
moves away from that thanks to intense segmentation. This has
allowed for more specialization in the semiconductor space and thus
wider ‘competitive moats’ for many firms in the industry as well
(Three Great Tech ETFs That Avoid Apple).
Also, growth in the data center segment has contributed
enormously to this sector. Add to this the overall sales of
semiconductor devices with its increased focus on servers, storage
and networking equipment which use semiconductors of the high-end
variety.
Semiconductor sales as we’ve seen have shown a modest growth in
2011. The trend is expected to continue this year, while 2013 would
likely be a year of stronger sales. However, the macroeconomic
condition still remains a matter of concern.
Some investors have shown avid interest in the semiconductor
sector. For investors seeking to play this trend in exchange traded
funds (ETFs), there are a variety of semiconductor ETFs offering
excellent exposure. Below, we discuss briefly some of the many
funds which fall in this sector, any of which could help investors
gain targeted exposure to the space.
Market Vectors Semiconductor ETF
(SMH)
Market Vectors Semiconductor ETF, which was converted from the
HOLDRs platform late in 2011, is one of the more popular ETFs in
the segment. The product is a non-diversified fund providing
exposure to just 26 semiconductor companies thereby offering
extremely concentrated exposure.
The fund has an asset base of $340.5 million of which it
allocates nearly 21% of its assets to Intel Corporation (INTC)
while also giving Taiwan Semiconductor Manufacturing Co. Ltd. (TSM)
and Texas Instruments (TXN) weights of 12.9% and 6.8%,
respectively (Intel Report Crushes Semiconductor ETFs).
This ensures that SMH offers investors a highly-concentrated bet
on large caps. Though broad exposure will not be achieved, this
means that the underlying securities will be extremely liquid. SMH
is rich in volume at 1,715,394 and charges an expense ratio of 35
basis points. The fund has added about 5% since the conversion.
PHLX SOX Semiconductor Sector Index Fund
(SOXX)
Just after SMH, iShares made an attempt to provide an exposure
to U.S. semiconductor stocks through PHLX SOX Semiconductor Sector
Index Fund. The fund is a non-diversified ETF that tracks the
PHLX Semiconductor Sector Index offering exposure to a small basket
of 31 semiconductor companies.
Like SMH, the fund is heavily invested in the top 10 holdings
investing 62.2% of the asset base of $213.4 million in those
companies. The fund gives its top weighting to Intel, allocating 9%
to the company. In addition to Intel, other top weightings go to
Taiwan Semiconductor and Broadcom Corp (BRCM).
The fund seems to be not as popular as SMH as the trading volume
stands at 191,100, much lower than SMH. The lower volume of the
fund can be attributed to a somewhat higher expense ratio of 48
basis points and SMH’s solid market position. In addition to the
higher expense ratio and lower volume, the fund delivered a return
of -7.9% over a period of one year.
SPDR S&P Semiconductor ETF
(XSD)
Investors looking for a broader space for investment in the
semiconductor sector should look to XSD. The fund tracks the
S&P Semiconductor Select Industry Index which represents the
Semiconductor sub-industry portion of the S&P Total Markets
Index. The index also uses a modified equal weighting system,
thereby giving equal weighting to small caps. (Small Cap Value ETF
Investing) The fund has an asset base of $34.18 million.
The fund invests in a larger basket of stocks compared to SMH
and SOXX, giving exposure to 50 semiconductor companies. Also,
unlike the first two funds, XSD does not offer concentrated
exposure, investing just 27% in the top 10 holdings, thereby
spreading the asset base in other companies as well.
Additionally, XSD doesn’t give the top portion to Intel, instead
allocating higher weightings to Cirrus Logic Inc. (CRUS) and
Skyworks Solutions Inc. (SWKS). For this diversified and less
concentrated exposure to semiconductor companies, the fund charges
an expense ratio of 35 basis points. However, over a period of one
year, the fund delivered a negative return of 23.1%.
PowerShares Dynamic Semiconductors Portfolio
(PSI)
For a slightly more active approach in the industry, PSI could
be an intriguing choice. The fund tracks the Dynamic Semiconductors
Intellidex Index which is designed to provide exposure to the
semiconductor space by thoroughly evaluating companies based on a
variety of investment merit criteria, including fundamental growth,
stock valuation, investment timeliness and risk factors.
Like other funds, this fund also provides a very narrow exposure
to semiconductor stocks. PSI holds a small basket of 30 stocks. The
fund invests 41% of the asset base of $18.4 million in top 10
holdings. Broadcom Corp and Qualcomm (QCOM) occupy the top two
positions in the fund while Intel takes the sixth position.
The fund appears to be expensive when compared to many others as
it charges an expense ratio of 63 basis points. PSI delivered a
negative return of 13.6% over a period of one year.
Direxion Daily Semiconductor Bull 3x Shares
(SOXL)
The Direxion Daily Semiconductor Bull 3x ETF seeks daily
investment results, before fees and expenses, of 300% of the
performance of the PHLX Semiconductor Sector Index. The
Semiconductor Index measures the performance of the semiconductor
subsector of the U.S. equity market (read Understanding Leveraged
ETFs).
As of March 31, 2012, the Semiconductor Index included companies
with a median market capitalization of $7.1 billion. The average
capitalization of the companies comprising the Semiconductor Index
was approximately $14.3 billion.
The fund holds a total of 30 semiconductor stocks. The fund
delivered a return of negative 41.9% over a period of one year. The
fund charges an expense ratio of 95 basis points.
Ultra Semiconductors
(USD)
The Ultra Semiconductors ETF seeks daily investment results,
before fees and expenses, of 200% of the performance of the Dow
Jones U.S. Semiconductor Index. The Dow Jones U.S.
Semiconductor Index measures the performance of the semiconductor
subsector of the U.S. equity market.
The Index holds a total of 45 semiconductor stocks, with Intel
coming in with the most assets. The fund delivered a return of
negative 18.3% over a period of one year and it charges an expense
ratio of 95 basis points a year.
Direxion Daily Semiconductor Bear 3x Shares
(SOXS)
The Direxion Daily Semiconductor Bear 3x ETF seeks daily
investment results, before fees and expenses, of 300% of the
inverse performance of the PHLX Semiconductor Sector Index.
The Semiconductor Index measures the performance of the
semiconductor subsector of the U.S. equity market.
Recently, the Semiconductor Index included companies with a
median market capitalization of $7.1 billion. The average
capitalization of the companies comprising the Semiconductor Index
was approximately $14.3 billion.
The fund holds a total of 30 semiconductor stocks. The fund
delivered a return of negative 30.2% over a period of one year but
charges investors 95 basis points a year in fees.
UltraShort Semiconductors
(SSG)
The UltraShort Semiconductors ETF seeks daily investment
results, before fees and expenses, of 200% of the inverse
performance of the Dow Jones U.S. Semiconductor Index. The
Dow Jones U.S. Semiconductor Index measures the performance of the
semiconductor subsector of the U.S. equity market.
The Index holds a total of 45 semiconductor stocks, with Intel
being the top choice for investment. The fund delivered a return of
negative 14.7% over a period of one year and charges an expense
ratio of 95 basis points. (Three All-Star Leveraged ETFs)
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INTEL CORP (INTC): Free Stock Analysis Report
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MKT VEC-SEMICON (SMH): ETF Research Reports
DIR-D SM BL 3X (SOXL): ETF Research Reports
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ISHARS-PH SOX S (SOXX): ETF Research Reports
PRO-ULS SEMICON (SSG): ETF Research Reports
PRO-ULT SEMICON (USD): ETF Research Reports
SPDR-SP SEMICON (XSD): ETF Research Reports
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