Technology stocks and the corresponding exchange traded funds have been key drivers of the bullishness surrounding the technology sector, the S&P 500’s largest sector weight, to start 2017.
For example, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are both up more than 10% year-to-date.
Semiconductor ETFs have recently been durable performers as semiconductor stocks are rebounding to steady the broader technology sector, but that does not mean the gains are over for this suddenly hot group. However, valuations are rising for chip stocks.
“The Philadelphia Semiconductor Index, composed of 30 chip-related companies, has gained 47 percent since last April, fueled by an unprecedented flood of mergers and orders for products that make up the guts of gadgets like refrigerators to smartphones. That’s made the $300 billion industry look expensive relative to earnings as growth is expected to moderate,” according to Bloomberg.
The tech sector could even see more free cash on hand if Congress proceeds with plans to cut down capital gains on repatriated earnings or follow in President-elect Donald Trump’s proposed repatriation tax holiday policy that would encourage large multi-national companies to bring back hundreds of billions of dollars in cash to the U.S. for possible use in dividends, deals or other projects. Trump plans to levy a 10% repatriation tax on U.S. companies’ overseas profits from foreign subsidiaries, compared to the current 35% tax rate.
Still, investors could be paying up for future catalysts for semiconductor and broader technology names. If there is a silver lining for the rising valuations on chip stocks it is that some industry observers believe the group’s valuations should not be measured in the traditional sense because of the evolution of the semiconductor business.
“That rally has pushed the price-earnings ratio for the semiconductor index to 28, versus its seven-year average around 22. The S&P 500’s price-to-earnings also sits around 22, making chip stocks not only expensive versus their historical norms, but also versus the wider market as well,” reports ETF Daily News.
Traders looking to make bearish bets on chip ETFs can consider the ProShares UltraShort Semiconductors (NYSEArca: SSG), which takes the -2x or -200% daily performance of the Dow Jones U.S. Semiconductors Index and the Direxion Daily Semiconductors Bear 3x Shares (NYSEArca: SOXS), which provides a -3x or -300% performance of the PHLX Semiconductor Select Index.
For more news and strategy on the Technology market, visit our Technology category.