Getting Defensive With Hot Semiconductor ETFs

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.