By Todd Rosenbluth, CFRA
CFRA remains bullish on many semiconductor securities, which helps support our view on a variety of related ETFs.
Angelo Zino, CFRA technology equity analyst, sees orders improving in the second half of 2017 and in 2018 as next-generation product launches support higher wireless demand. While he expects secular declines to persist in the PC space, he sees an aging infrastructure supporting more modest declines going forward.
Zino thinks the communications and consumer end markets will remain healthy despite periods of lumpiness, as carrier comments in China suggest to him an improved spending outlook for 2018 as well as continued growth in smartphones. CFRA also sees continued growing demand for NAND flash memory equipment, primarily reflecting the rising trend of greater memory content per smartphone and the ongoing adoption for solid-state devices.
In addition, technology investments related to 3D NAND should provide a boost to spending demand conditions. CFRA has STARS rankings on 65 US semiconductor and semiconductor equipment stocks, with 26 of them Strong Buy or Buy recommendations.
iShares PHLX Semiconductor ETF (SOXX) has $1.3 billion in assets. Exposure is primarily to semiconductor stocks (85% of assets), such as NVIDIA (NVDA) and Broadcom (AVGO) while semiconductor equipment stocks (15%), like Lam Research (LRCX), are much less represented. In addition to US stocks, the ETF has exposure to companies based in Singapore and Taiwan. The ETF trades on average 400,000 shares daily, with a tight bid/ask spread and it has a 0.48% net expense ratio.
VanEck Vectors Semiconductor (SMH) has $1 billion in assets, but trades 3.3 million shares daily. While sub-industry exposure is similar to the SOXX index, exposure to Taiwan is much greater, with CFRA buy-recommended Taiwan Semiconductor Manufacturing as the largest holding. SMH has a 0.35% net expense ratio. Both SOXX and SMH have hefty weightings in large-cap stocks.
SPDR S&P Semiconductor (XSD) has $330 million in assets and trades 50,000 shares daily. Unlike SOXX and SMH, XSD only holds semiconductor stocks and is equally weighted. As such, mid-caps, such as CFRA buy-recommended Marvell Technology, is of similar size in the portfolio as AVGO. The ETF has a 0.35% net expense ratio.
Related: Getting Defensive With Hot Semiconductor ETFs
PowerShares Dynamic Semiconductors (PSI) has $315 million in assets and trades 70,000 shares daily. Unlike the three of other ETFs, whose holdings are relatively static, PSI tracks an index based on value, quality, and momentum characteristics – the index of 30 stocks is rebalanced and reconstituted quarterly. ADI and AVGO are two of the ETF’s semiconductor holdings, but the PSI recently had more exposure to semiconductor equipment stocks (35% of assets), including Applied Materials (AMAT) than its peers. PSI has a 0.63% expense ratio.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.