Sizing Up This Vital Semiconductor ETF | ETF Trends

For all the trade-related headwinds semiconductor stocks and ETFs have had to deal with this year, the group is one of the leaders in the technology sector. After jumping 3% last week, the VanEck Vectors Semiconductor ETF (SMH), one of the most widely tracked chip ETFs, is higher by more than 41% year-to-date.

Integral to that thesis is repairing the damaged US/China trade relationship. Previously, President Trump said that the U.S. will eliminate any attachments with Chinese multinational technology company Huawei on Friday as well. The decision to block Huawei was arrived at after China stemmed from buying American agricultural products in retaliation for the president’s unexpected tariffs threat last week. China also permitted its currency to depreciate against the dollar to a key level unseen since 2008, likely in an effort to make Chinese exports cheaper and outperform U.S. products.

“It definitely has been the leadership. It has also been the sign of the risk-on trade for the market. I think that even if you get a little short-term pullback in the semiconductor stocks here, I’d be a buyer of it,” Craig Johnson, chief market technician at Piper Jaffray, said in an interview with CNBC.

SMH Superlatives

Semiconductor have exhibited high sensitivity to the trade war because China is a strong driver for the chip-making sector, which includes several fast areas of growth including gaming and artificial intelligence. If the trade war is renewed, the barriers will raise costs for many of these multi-national companies.

Some market observers believe the rally in chip stocks can continue, particularly if investors remain enthusiastic about 5G. 5G technology will use a higher frequency band versus the current 4G technology standard, resulting in faster transmission of data.

“The SMH ETF is also up more than 40% for the year, its best since 2009. Teradyne, Universal Display, KLA and Lam Research have led the ETF with gains of more than 70%,” according to CNBC.

Related: How ETF Investors Could Enhance a Portfolio with Disruptive Innovative Companies 

Over the course of market history, different industries have taken turns being important tells regarding broader market health. These days, some market observers believe semiconductor stocks and the related ETFs are those tells.

SMH holds 25 stocks. Intel Corp. (NASDAQ: INTC) and Taiwan Semiconductor (NYSE: TSM) combine for over 23% of the fund’s weight.

For more information on the tech sector, 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.