Notably, all of these companies-with the exception of Intel-have exposure to a range of other industries outside of the usual computer segment. Linear Technology, for example, makes chips that help manage power supplies in various devices, while Broadcom supplies chips to a number of wireless service base station and handset providers.
As is the case with many tech stocks, semiconductors are still emerging from a fairly prolonged slump. The PowerShares fund, for example, is still down about 23% from where it was five summers ago even though it's up about 50% since it hit rock bottom in late 2008. Its 0.63% expense ratio appears a bit high, perhaps due to the fund having just $20 million in assets. A larger asset base leads to more trading volume, which enables funds to lower their expense ratios.
The SPDR S&P Semiconductor ETF (XSD) appears to strike the best balance of reasonable fees (it has a 0.35% annual expense ratio), portfolio diversification and fairly low bid/ask spreads. The fund's portfolio is the real appeal here--no single stock accounts for more than 3%, and the chip makers in the fund have exposure to clean energy, computing graphics, LED lighting, flash memory, audio chips and many others. That means the fund nicely reflects the broad-based set of applications that are finding a need for a higher content of chips.
A Timely Trade?
As noted, chip stocks tend to trade especially well in the fall and winter, and some investors believe semiconductor stocks are best suited for short-term trades rather than long-term investments.
If you simply want to play a potential rally, then the leveraged ETFs could be a good option. The Direxion Daily Semiconductor Bull 3X Shares (SOXL), for example, moves at three times the rate of the underlying Philadelphia Semiconductor Index (SOXX).
This fund hit north of $70 in early 2011, and topped $45 this past spring. But the sector's summer doldrums have pushed shares down to a recent $31. The 1.09% expense ratio is a bit stiff and the risk is considerable, as is the case with any 3X fund, but this fund has the potential for the most robust upside of any ETF in the semiconductor segment.
Investors have been fixating on the challenges for Intel due to the ongoing erosion of PC sales. Yet beyond PCs, demand for chips in other applications appears to be on the cusp of a steady, product-driven upturn. In light of this sector's historical seasonal trading patterns, that could set the stage for a timely investment.
David Sterman has worked as an investment analyst for nearly two decades. He was a senior analyst covering European banks at Smith Barney and was research director for Jesup & Lamont Securities. He also served as managing editor at TheStreet.com and research director at Individual Investor magazine.