The technology sector is the best-performing group in the S&P 500 this year and semiconductor stocks are a big reason why. The VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are up 38.4% and 40.4%, respectively, year-to-date.
Some market observers believe investors should not bet on comparable returns for semiconductor stocks and the related exchange traded funds in 2018.
“Despite a recent sell-off, the Philadelphia Semiconductor Index is up 92 percent since the beginning of 2016 and is poised to beat all 11 S&P sectors for a second consecutive year, fueled by earnings growth and an unprecedented period of consolidation,” reports Bloomberg. “While the streak hasn’t quite turned analysts bearish, some are advising investors to be selective with their picks and vigilant for signs of slowing demand and rising inventory levels.”
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.
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.
“Acquisitions and potential for earnings growth remain, but multi-year-high multiples may have less room to expand,” according to Bloomberg. “Auto and industrial chip content growth remains a secular story, and 2018’s memory pricing may remain strong, contingent on phone demand.”
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.
“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.”
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