Tough Times For Chips, but Don't Forget This Semiconductor ETF

With growth and technology stocks being epicenters of turbulence in the recent market swoon, it could be easy for some investors to take a pass on semiconductor equities and ETFs, but that decision should not be made in haste.

Some of the ETFs in this category still merit consideration, including the SPDR S&P Semiconductor ETF (NYSEArca: XSD).

XSD seeks to provide investment results that correspond generally to the total return performance of an index derived from the semiconductor segment of a U.S. total market composite index. In seeking to track the performance of the S&P Semiconductor Select Industry Index (the “index”), the fund employs a sampling strategy.

In fact, there could be some evidence pointing to semiconductor stocks and ETFs being a leadership group when the coronavirus issue is resolved.

“While most industries have shut down, necessities in the medical, food and logistics industries have carried on working,” a report noted. “Semiconductors are one of the industries that have carried on production—even in Wuhan itself. There couldn’t be more of a striking example as to how important the semiconductor industry is to the Chinese government. It can’t stop for a week, even for covid-19.”

Other Perks For The Chips

As an equal-weight ETF, XSD isn’t heavily allocated to one or a few names, potentially helping it avert stock-specific risk as coronavirus headlines ebb and flow.

“Unlike rival chip ETFs, XSD isn’t as reliant on a small number of stocks because it’s an equal-weight fund. The fund has 36 holdings, the largest of which is Nvidia at just 3.97%,” reports InvestorPlace. “That means smaller stocks are more prominent in XSD as highlighted by its average market value of $34.7 billion. That’s still large-cap territory, but it’s smaller than what’s found on rival chip funds.”

As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters, ETFs like XSD could offer rally potential.

Over the past decade, semiconductor companies have grown more efficient, reducing costs and increasing production. Chipmakers learned to streamline production and improve their capacity planning and equipment spending. Meanwhile, chip demand surged as the global economy expanded.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.