After surging last year, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) are on a torrid pace to start 2018. SMH is up 10.5% to start 2018 while SOXX is higher by 10.7%.
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.
“Already this year, the space as a whole has outpaced broader markets’ performance. The SMH semiconductor ETF is up 10 percent for the year to date, while the XLK Technology ETF (in which semiconductors have a 14 percent weighting) has risen 6.7 percent. The S&P 500 has climbed 5.6 percent during the same period,” reports CNBC.
Big-name diversified technology ETFs also feature semiconductor exposure. For instance, the Technology Select Sector SPDR Fund (NYSEArca: XLK) includes companies from technology hardware, storage, and peripherals; software; diversified telecommunication services; communications equipment; semiconductors and semiconductor equipment; internet software and services; IT services; electronic equipment, instruments and components; and wireless telecommunication services.
Still, some market observers believe the semiconductor space is richly valued.
“The outperformance has made individual names in the space expensive, though. Take Nvidia for example – its shares have surged 20 percent since the beginning of the year, quadruple gains by the S&P, putting its price-earnings ratio at 50 times forward earnings,” according to CNBC.
“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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