Encouraging Signs For Semiconductor ETFs

There has been plenty of talk about recent weakness in the technology sector. Semiconductor stocks and exchange traded funds haven’t been immune to that trend. Over the past month, the iShares S&P NA Tec. Semi. Idx. Fd.(ETF) SOXX 1.6% and the VanEck Vectors Semiconductor ETF SMH 1.44% are off an average of 1.7 percent.

SOXX, the iShares semiconductor ETF, tracks the widely followed PHLX SOX Semiconductor Sector Index. That ETF holds 30 stocks. SMH follows the MVIS US Listed Semiconductor 25 Index, but contrary to that index’s name, the ETF holds 26 stocks.

With earnings season afoot, investors may want to revisit technology ETFs as the sector is expected to post robust earnings growth. Estimates indicate Wall Street is enthusiastic about semiconductor earnings as well.

Nice Estimates

“Information technology companies in the SPX are expected to report 10.5% year-over-year earnings growth, the second highest behind the energy sector, according to FactSet,” Benzinga reported Tuesday. “Of the seven industries in the sector, their research projects that semiconductor and semiconductor equipment industry will report the highest earnings growth (41%). If it is excluded, the expected earnings growth for the sector rate would drop to 4.3%.”

SMH and SOXX focus heavily on the biggest chipmakers. Taiwan Semiconductor Co. TSM 0.88% and Intel Corporation INTC 0.97% combine for over 23 percent of SMH’s roster, while Nvidia Corporation NVDA 4.25%, Broadcom Ltd AVGO 2.3% and Qualcomm, Inc. QCOM 1.57% combine for almost a quarter of the SOXX lineup.

For the week ended July 10, SMH added $362 million in new assets; Only eight ETFs added more new money during that period. Year-to-date, SMH and SOXX have added nearly $582 million in new assets on a combined basis.

Industry Trends

Semiconductor industry trends are encouraging with industry research firm Gartner forecasting sales to rise to over $401 billion this year.

“A shortage of memory is creating a boom in the overall semiconductor market,” according to Gartner. “Memory vendors have been able to increase their price for DRAM and NAND, driving revenue and margins higher.”

South Korea’s Samsung is the biggest semiconductor memory supplier, but that stock isn’t a major holding in SOXX or SMH.