The technology sector is the best-performing group in the S&P 500 this year and semiconductor stocks and the related exchange traded funds are big reasons why.
For example, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are up an average of 17%.
Those gains for the semiconductor ETFs are more than double the returns of the S&P 500 and well ahead of broader tech ETFs. 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.
Additionally, there are growing concerns among industry observers and technical analysts that semiconductor stocks are poised to retreat.
Right now, I’m starting to see some little divergences crop up when I look at the relative strength indexes, the [moving average convergence/divergence]indicators; they’re not making new highs alongside the index itself,” said Craig Johnson, technical analyst at Piper Jaffray, in an interview with CNBC.
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.
“Johnson said he would be cautious here, as the fundamental elements indeed appear positive, ‘but right now, I’d rather trim some off the table here and be selectively investing in some of the chip names than just all in on these names at this point in time,” according to CNBC.
Several of the S&P 500 stocks that have gained at least 20% this year are semiconductor stocks, including some names that reside in SMH and SOXX.
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.