The technology sector is once again outperforming the broader market this year. For example, the Technology Select Sector SPDR (NYSEArca: XLK) is up 3.9% compared to 2.5% for the S&P 500.
There could be more upside to come for technology stocks and exchange traded funds if highly cyclical semiconductor equities firm.
“The semiconductor and semiconductor equipment industry is arguably the most cyclical in the entire technology space and an industry to focus on as signs of improving US economic growth materialize. According to S&P Capital IQ, important factors to consider when looking at the fundamental health of the industry include end-demand prospects and capital spending initiatives, among other things,” said the research firm in a new note.
The iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) has performed in-line with XLK this year, though the Market Vectors Semiconductor ETF (NYSEArca: SMH) has outpaced the big tech and semiconductor ETFs with a year-to-date gain of nearly 5%.
“S&P Capital IQ equity analyst Angelo Zino thinks the semiconductors & semiconductor equipment industry is benefiting from healthy end-market demand for its products, specifically within the smartphone arena,” said S&P Capital IQ. “Longer-term S&P Capital IQ expects capital spending to be robust as manufacturers like Intel, Taiwan Semiconductor, and Samsung keep budgets elevated, given competitive pressures and investment in next generation technologies.” [Intel Woes Highlight Differences in Chip ETFs]
S&P Capital IQ has four-star ratings on Dow component Intel (NasdaqGS: INTC), Avago Technologies (NasdaqGS: AVGO) and Microchip Technology (NasdaqGS: MCHP). Shares of Intel are off nearly 9% this year, making the world’s largest semiconductor maker one of just four Dow stocks to be down 5% or more in 2015. Intel is the largest holding in the $463.3 million SOXX at a weight of almost 8%.
S&P Capital IQ has overweight ratings on SOXX and XLK and a marketweight rating on the SPDR S&P Semiconductor ETF (NYSEArca: XSD). As it was last year, the equal-weight XSD has been a star among tech ETFs in 2015, surging 11.3%. [This Year’s top Tech ETF]
The $189 million XSD allocates 7.6% of its combined weight to Intel, Avago and Microchip Technology. The ETF has easily outpaced the rival SOXX over the past year, but XSD is more volatile. As is the case with the broader technology sector, the semiconductor industry is home to an array of cash-rich firms.
“Ten of the 52 companies comprising the S&P 1500 semiconductors & semiconductor equipment industry each hold more than $2.8 billion of cash and equivalents on their balance sheets led by Intel,” notes S&P Capital IQ.
SPDR S&P Semiconductor ETF
