The Technology Select Sector SPDR (NYSEArca: XLK), the largest technology exchange traded fund by assets, along with rival, traditional technology ETFs such as the Fidelity MSCI Information Technology Index ETF (NYSEArca: FTEC) and the Vanguard Information Technology ETF (NYSEArca: VGT) are surging this year.
Semiconductor stocks are proving to be important drivers of the technology sector’s year-to-date ascent. For example, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are up an average of 18.7% this year.
Amid that bullishness, some semiconductor industry observers are concerned that the group could be poised to retreat, potentially weighing on the broader technology sector in the process.
Hedge fund manager Dan Niles, a former semiconductor analyst, “says there’s too much complacency among investors, especially when it comes to semiconductor stocks. If those stocks see a sell-off, it could drag down the rest of the market,” reports CNBC.
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.
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.
“If you look at semiconductors — which is where I have the real problem — the semiconductor index in 2016 was up 37 percent. The revenue growth was 2 percent. This year, the semiconductor index is up 18 percent, and the revenue growth is maybe 5 percent,” Niles told CNBC.
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.
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