The Invesco PHLX Semiconductor ETF (SOXQ) is higher by nearly 18% year-to-date, indicating that chip equities are rebounding from a dismal 2022 showing. Still, there’s a dichotomy of challenges and opportunities facing investors considering semiconductor equity exposure.
Investors looking to split the difference by not holding dedicated chip allocations while having some exposure to the industry can consider exchange traded funds such as the Invesco QQQ Trust (QQQ) and the Invesco NASDAQ 100 ETF (QQQM).
QQQ and QQQM both track the Nasdaq-100 Index (NDX), which is home to multiple semiconductor stocks. Translation: The ETFs have solid chip equity exposure but are not dedicated to that theme. That could be a desirable trait in the current market environment.
“In Europe, the lack of a catastrophic energy crisis in the current winter season has also prompted a reconsideration among economic forecasters of the depth of a potential recession. And in China, with the economy on its way to fully reopening, an additional global economic tailwind waits in the wings. With inflation, interest rates and growth all stabilizing, 2023 could very well be a year of recovery for the global economy, and for the semiconductor industry in particular,” according to Nasdaq research.
The other side of the equation is that China’s economic rebound could prove lumpy as 2023 moves along, and it’s possible that interest rate tightening in major developed economies, including the U.S., won’t have the desired effect of engineering a soft landing. Rather, some market observers believe the landing will be uncomfortable.
Additionally, it’s possible that, due to weakness in the personal computer (PC) segment, chip demand will contract this year. On the bright side, the long-term trend for the industry is attractive, particularly with end markets beyond PCs emerging.
“Thanks to much faster growth in Automotive (14% CAGR), Servers/Datacenters/Storage (13%), Industrial Electronics (12%), Consumer Electronics (9%), Wired/Wireless Infrastructure (8%), and Smartphones (6%), PCs (3%) will be the 5th- biggest end market for semis by the end of the decade,” noted Nasdaq.
Adding to the allure of chip equity exposure is that cost of admission is attractive from a valuation perspective — a concept enhanced by QQQ and QQQM because a variety of the ETFs’ non-chip holdings are also undervalued.
“Looking at valuations over the same time frame, one can see the sector currently trading notably below its index- weighted average trailing P/E of 22.2 since year-end 2010, with a year-end 2022 P/E of 18.2. EV/EBITDA multiples are also very reasonable, at 11.5 vs. a long-run average of 12.2 since 2010,” concluded Nasdaq.
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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.
