A strong greenback, higher inventories in the semiconductor and electronics supply chain and the launch of Windows 10 were held responsible for this decline, per the research agency. This, coupled with semiconductor giant Intel Corporation’s (INTC) underperformance wreaked havoc in the space. Notably, the INTC stock is down over 23% this year (as of September 1, 2015).
Compelling Valuation
Semiconductor stocks and the related ETFs have seen a considerable slide this year that erased its prior year’s gains and slipped into the negative territory in the one-year frame. Now, semiconductor analysts believe that most of the downside is reflected in the current level. Chip stocks have declined 25% and are now due for their way up as per analysts.
Semiconductor ETF Market Vectors Semiconductor ETF (SMH) presently trades at a P/E (ttm) of 17 times against the broader technology ETF Technology Select Sector SPDR ETF’s (XLK)P/E (ttm) of 18 times and high-flying Internet ETF First Trust Dow Jones Internet ETF’s (FDN)P/E of 41 times. Moreover, the space might witness a surge in sales in the latter part of 2015 as it includes the all-important shopping season and is likely to see a significant increase in the purchase of smartphones.
In fact, World Semiconductor Trade Statistics (WSTS) also approves of this pattern as the agency forecast that the semiconductor market will be mainly propelled by smartphones and automotive this year. Moreover, some analysts opine that the PC market is set for a rebound helping the companies like Intel (read: Intel Q2 Earnings Beat to Fuel Semiconductor ETFs).
All semi ETFs including SMH, iShares PHLX Semiconductor ETF (SOXX), SPDR S&P Semiconductor ETF (XSD ) and PowerShares Dynamic Semiconductors Fund (PSI) gained about 2.3%, 2.4%, 4.7% and 2.7%, respectively, in the last five trading sessions.
Caution
Having said this, we would like to note that the fundamentals are yet to improve for the semiconductor sector. The sector is still hovering in the bottom 18% region of the Zacks Industry Rank. The world semi market is expected to grow 3.4% year over year this year (per WSTS) while growth for 2016 and 2017 will likely be 3.4% and 3%, respectively.
Also, not all semiconductor ETFs are as cheap as SMH, as other ETFs including XSD and PSI presently have a P/E (ttm) of 27 times and 23 times. All of the above-mentioned ETFs have weighted alpha of negative 9.34, 10.68, 4.84 and 3.51 respectively hinting at further bearishness. Still, investors eyeing this apparently rebounding space might watch these semiconductor ETFs closely (read: 5 ETF Winners & Losers from Earnings Season).
SOXX in Focus.
This ETF follows the PHLX Semiconductor Sector Index and offers exposure to 30 domestic firms. It is highly concentrated on the top 10 firms with about 60% of total assets. Two-thirds of the portfolio is dominated by large cap stocks while mid caps take the remainder, with just 3% going to small caps (read: A Comprehensive Guide to Semiconductor ETF Investing).
The fund has amassed $331 million in its asset base and trades in average volume of roughly 600,000 shares a day. The product charges 47 bps in fees a year from investors. SOXX has a Zacks ETF Rank #3 (Hold).
SMH in Focus
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 35% of total assets while other firms hold no more than 6.06% share each. From a market cap look, the product focuses on large cap stocks, as together these account for about 81% of the portfolio.
The product has managed assets worth $354 million and charges 35 bps in annual fees and expenses. It is heavily traded with volume of more than 4.3 million shares per day. This fund has a Zacks ETF Rank #3.
XSD in Focus
This fund tracks the S&P Semiconductor Select Industry Index, holding 47 stocks in its portfolio. It is widely spread across each security as none of these allocates more than 3.09% of the assets. The product has a definite tilt toward small cap stocks at 54%, followed by 28% in mid caps and 18% in large caps (see: all the Technology ETFs here).
The fund is less popular and illiquid with AUM of $108.1 million and average daily volume of under 100,000 shares. It charges 35 bps in fees per year. The fund has a Zacks ETF Rank #3.
PSI in Focus
This Zacks ETF Rank #3 fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in the basket with none holding more than 5.93% of assets. Here again, the ETF is skewed toward small caps at 46% while large caps and mid caps account for 36% and 18%, respectively.
The product, with AUM of $62 million is often overlooked by investors and hence sees a lower average daily volume of 45,000 shares. Expense ratio came in at 0.63%.
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MKT VEC-SEMICON (SMH): ETF Research Reports
ISHARS-PHLX SEM (SOXX): ETF Research Reports
SPDR-SP SEMICON (XSD): ETF Research Reports
PWRSH-DYN SEMI (PSI): ETF Research Reports
INTEL CORP (INTC): Free Stock Analysis Report
SPDR-TECH SELS (XLK): ETF Research Reports
FT-DJ INTRNT IX (FDN): ETF Research Reports
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