Semiconductors have been around for more than a half century, and in that time they've become embedded in our daily lives in everything from cell phones to refrigerators to automobiles.
All the world seems to run on chips, but investing in the stocks of chip makers and chip equipment suppliers can be tricky. It's a cyclical industry, and to make money you have to time it right. And that time is now. For a host of reasons, semiconductor stocks are setting up for a timely trade, and there are a handful of ETFs that can help capture those gains.
A key factor that should drive this group higher is investor psychology. Investors tend to be bullish about this sector as the year begins but eventually lose interest toward the middle of the year, only to show renewed interest late in the year.
According to 20 years' worth of data compiled by FactSet Research, chip stocks have tended to rise 11% in the first four months of the year, fall 4% over the next five months, and then finish the year with a strong 7% gain over the final three months. Said another way, from October 1 through the end of April, this group has historically tacked on an 18% gain.
Not All Chips Are Equal
Yet investors have been wary of the chip sector as the gorilla in the space, Intel, battles with a tectonic shift in computing that includes Apple and Google's tablet computers (neither of which use Intel's chips). Tablets are quickly cannibalizing the demand for PCs and laptops, setting up a stage of flat or even negative growth for Intel in coming years.
Even though demand for chips in many other devices-including tablets and smart phones-continues to rise and will benefit a host of chip-related companies, Intel's fortunes have cast a pall over this group in recent months and has contributed to investor indifference toward this industry.
"Sentiment feels washed out, and as a result we remain optimistic this group could trade higher," says Citigroup's Terence Whalen.
He's referring to that weak summer trading pattern that generally precedes an eventual robust rally. Whalen's research colleague, Glen Yeung, cites a more tangible reason for optimism. He thinks the next few quarters will bring the release of a range of new products from Apple and others that should help chip industry sales grow nicely into 2013.
Putting Your Chips On The Table
There are more than a half dozen ETFs that focus on this group, but not all look like wise investments right now. For example, the Market Vectors Semiconductor ETF (SMH) is a fund to avoid because Intel accounts for 20% of the ETF, and that could drag down performance.
A better play might be the PowerShares Dynamic Semiconductors Portfolio (PSI). The fund managers have intentionally spread their bets around, and chip makers such as Linear Technology, Broadcom, Analog Devices, Intel and Maxim Integrated Products. Every one of these stocks accounts for around 5% of the fund.