Sizing up a Semiconductor ETF Approaching New Highs | ETF Trends

After slumping during the worst of the coronavirus market swoon, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) is on a roll and is within spitting distance of its previous highs. Investors should investigate which SMH components are fueling the fund’s recent bullishness.

SMH, one of the bellwether semiconductor ETFs, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Listed Semiconductor 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor industry. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

Bank of America notes chips stocks are at a “critical juncture,” though the bank “remains bullish on the chip industry thanks to its secular and structural growth drivers even as the world’s two largest economies face a rift over China’s relationship with Hong Kong,” reports CNBC.

SMH Is Soaring

There could be some evidence pointing to semiconductor stocks and ETFs being a leadership group when the coronavirus issue is resolved. Over the past month, SMH is higher by nearly 13%, a clear sign the fund is participating in the recent strength in the broader technology sector.

As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters.

“Longer-term we believe semis will play a critical role in the new digital economy which is built on the processing, storing and networking abilities enabled by this very profitable, consolidated and disciplined sector,” according to Bank of America.

“Among large-cap semiconductor names, Nvidia is Bank of America’s top pick. While demand for chips slumped during the first half of 2020 due to the global pandemic, certain companies benefited from surging compute requirements needed for work-from-home, e-commerce, video streaming,  and gaming,” according to CNBC.

Nvidia is one of the largest holdings in SMH.

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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.