ETF Trends
ETF Trends

Semiconductor ETFs, such as the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX), are key drivers of this year’s rally in the technology sector, but with some impressive gains already notched by chipmakers, some traders are turning defensive.

SMH is up more than 9% over just the past month and hit a new high this week, driving its year-to-date gain to over 33%.

“Worldwide semiconductor revenue is forecast to total $401.4 billion in 2017, an increase of 16.8 percent from 2016,” according to Gartner, Inc. “This will be the first time semiconductor revenue has surpassed $400 billion. The market reached the $300 billion milestone seven years ago, in 2010, and surpassed $200 billion in 2000.”

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.

“At the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX), speculators have bought to open 9,351 puts on SMH in the past 10 sessions compared to 1,709 calls. The resultant put/call volume ratio arrives at 5.47 — versus a reading of 3.00 from two weeks back,” according to Schaeffer’s Investment Research.

Related: Cost-Effective ETF Technology Sector Exposure

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.

“Echoing this heavy put-skew is SMH’s Schaeffer’s put/call open interest ratio (SOIR) of 4.27. Not only does this show that puts more than quadruple calls among options set to expire in three months or less, but it ranks higher than 70% of all comparable readings taken in the past year. In other words, short-term speculators are more put-heavy than usual toward the fund,” notes Schaeffer’s.

There are some risks to consider with semiconductor stocks and ETFs. For example, President Donald Trump has pushed for restrictions on trade barriers with China, which might pose a threat to the sector. China is a key market for the global semiconductor industry, consuming more than $100 billion worth of semiconductors or roughly one-third of the world population.

For more news and strategy on the Technology market, visit our Technology category.

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.