Posted on Thursday, February 7th, 2013 | In Stocks to Watch
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 (The Comprehensive Guide to Semiconductor ETFs).
However, 2012 did not prove to be a good year for the industry. Competition was very high in the space, and investors started to shun larger tech companies by the end of the year.
Yet, after recording slow growth in 2012, the semiconductor industry is all set to rebound in 2013 with the recovery projected to pick up speed in the latter part of the year. And beyond the traditional sources of revenue drivers like wireless handsets and wireless communication, this year industry growth will also be triggered by power management.
The spending on communication should rebound in 2013 with the rising market share for smartphones which should boost the demand for semiconductor devices. Also with the consumer gaining confidence in the market, electronics would see more demand.
Moreover, industrial consumption of semiconductors is expected to be one of the strongest this year, driven by the need for production efficiencies, which in turn is increasing demand for power management semiconductor solutions.
Another boost for the industry could be the emerging automotive industry. The growing electronic content within this market is a secular trend, as demand for safety, infotainment, navigation and fuel efficiency continue to increase. As a result, semiconductors serving this market should grow stronger than the broad industry over the next few years (Strong Auto Sales: Good News for Metal ETFs?).
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 a targeted exposure to the space:
Market Vectors Semiconductor ETF (SMH)
The Market Vectors Semiconductor ETF is one of the popular ways to tap the segment. The product is a non-diversified fund providing exposure to just 26 semiconductor companies thereby offering an extremely concentrated exposure (Create a Diversified Portfolio Using ETFs).
The fund has an asset base of $280.8 million of which it allocates nearly 18.2% of its assets to Intel Corporation while also giving Taiwan Semiconductor Manufacturing Co. Ltd. and Texas Instruments weights of 14.3% and 6.6%, respectively.
SMH provides liquidity as indicated by its trading volume of more than 1 million shares a day. The fund charges an expense ratio of 35 basis points.
PHLX SOX Semiconductor Sector Index Fund (SOXX)
Just after SMH, iShares made an attempt to provide 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 61.4% of the asset base of $221.3 million in these firms. The fund gives its top weighting to Applied Materials, allocating 8.2% to the company. In addition to Applied Materials, other top weightings go to Texas Instruments and Intel Corp.
The fund seems to be not as popular as SMH as the trading volume stands at just more than 100,000 shares a day, much lower than its Market Vectors counterpart. 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.
SPDR S&P Semiconductor ETF (XSD)
Investors looking for a broader play in the semiconductor sector should look to XSD. However, it appears that the fund is neither rich in asset base nor offers liquidity to investors. The fund has an asset base of $71.49 million and trades at a volume of just 55,100 shares a day (New Leadership in the Tech ETF Space?).
Contrary to SMH and SOXX, the fund invests in a larger basket of stocks, giving exposure to 50 semiconductor companies. Also, unlike the first two funds, XSD does not offer concentrated exposure, investing just 27.1% in the top 10 holdings, thereby spreading the asset base in other companies as well.
XSD has allocated higher weightings to Cree Inc and Atmel Corp. For this diversified and less concentrated exposure to semiconductor companies, the fund charges an expense ratio of 35 basis points.
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 on the list, this ETF also provides a very narrow exposure to semiconductor stocks, holding 30 firms in total. The fund invests 46.9% of the asset base of $16.6 million in the top 10 holdings.
Among individual holdings, KLA Tencor Corporation, Linear Technology Corp and Intel Corp occupy the top three positions in the fund. The fund appears to be expensive when compared to many others, as it charges an expense ratio of 63 basis points (Guide to the 25 Cheapest ETFs).
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PWRSH-DYN SEMI (PSI): ETF Research Reports
MKT VEC-SEMICON (SMH): ETF Research Reports
ISHARS-PH SOX S (SOXX): ETF Research Reports
SPDR-SP SEMICON (XSD): ETF Research Reports
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