Semiconductor ETFs in Focus as Chip Sales Skyrocket

 |  Includes: PSI, SMH, XSD
by: Michael Johnston

The Semiconductor Industry Association recently reported a major increase in the sales of computer processing chips for the month of May, giving investors reason to optimistic on a sector that has been battered by recent market turmoil. Chip sales rose 4.5% from the previous month, and were up nearly 50% from the same month in 2009. “Many industry analysts have given bullish outlooks on the information-technology sector in recent months as demand has come back from year-earlier levels,” writes Nathan Beck. The surge in sales is primarily attributed to the world’s emerging markets, where sales for computation and communication devices have been steadily growing. Along with the major help from countries overseas, the recent wave of popularity in tablet computers (most notably the Apple iPad) and smartphones have also helped put the chip industry back on track.

While overseas demand has increased, the chip industry has yet to fully regain the ground lost U.S. markets during the recent recession. Many of the nation’s chip producers rely on businesses to drive sales. But as companies entered survival mode and made concerted efforts to conserve cash, many discretionary items, such as new technology, were pushed aside indefinitely. Although prospects have improved considerably, the big “tech refresh cycle” that many analysts had been anticipating has been slow to materialize. The ongoing crisis in Europe also has many worried that sales will slump as spending power in that region of the world declines. Though the industry in the U.S. has performed poorly as of late, it will be an important one to watch as emerging markets help guide sales back to peak levels.

Semiconductor ETF Options

For investors looking to make a play on the recently boosted semiconductor market, we outline three ETFs with significant exposure to this corner of the market.

PowerShares Dynamic Semiconductors (NYSEARCA:PSI)

This ETF tracks the Dynamic Semiconductors Intellidex Index, a benchmark comprised of stocks of semiconductor companies. The index selects companies to invest in based on fundamental growth, stock valuation, investment merit criteria, investment timeliness, and risk factors. PSI’s top holdings include Intel Corporation (NASDAQ:INTC) (5%), Broadcom Corporation (NASDAQ:BRCM) (5%), and Texas Instruments (NASDAQ:TXN) (4.8%). Though this fund stays entirely in the United States, these major companies sell significant portions of their products overseas, thereby benefiting from emerging market demand. This ETF allocates the majority of its assets to medium and small market capitalization companies.

HOLDRS Merrill Lynch Semiconductor (NYSEARCA:SMH)

Like most HOLDRS offered by Merrill Lynch, this fund maintains heavy concentrations in only a handful of component stocks. SMH has a total of 18 securities with Intel Corporation (23.5%) and Texas Instruments (19.8%) topping the list. SMH’s spreads its investments relatively evenly across giant, large, and medium market capitalization firms. Like PSI, this ETF also has exclusive U.S. exposure.


State Street’s XSD measures the S&P Semiconductor Select Industry, an equal weighted market cap index that represents the semiconductor sub-industry portion of the S&P Total Markets Index. Due in part to the weighting methodology used, this ETF boasts lesser known companies in its top holdings, with Skyworks Solutions (NASDAQ:SWKS) (4.3%), and Linear Technology (NASDAQ:LLTC) (4.2%) taking the highest weightings. The 26 holdings of XSD stay primarily in medium and small market capitalization companies, and again this fund consists exclusively of U.S. stocks.

Disclosure: No positions at time of writing.

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