XSD: When The Chips Are Down

| About: SPDR S&P (XSD)

Summary

Semiconductors are the foundation of the new global economy.

The subsector is volatile, so an ETF is a better choice than individual stock picking.

A disciplined investment approach will dampen short term market swings over the long run.

History books are peppered with numbered footnotes with reference to lesser known but often key contributors to their field. Such is the case with Jan Czochralski whose work on the crystallization rate of metal alloys in the year 1916 was foundational to modern electronics. As often is the case when a scientist deeply focused while in the lab and not paying attention to the things around him, Czochralski accidently dipped his pen into a small crucible of molten lead instead of the nearby ink bottle. He quickly withdrew the pen and molten lead solidified into a long thin thread. He recognized the implications immediately. The clue provided by the chance event led him to develop the Czochralski Process which is used to grow extremely pure silicon crystals and is the basis for the manufacture of semiconductors today. In Poland, Jan Czochralski is honored alongside other famous Polish scientist such as Maria Skłodowska-Curie and Nicolas Copernicus.

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Arguably, the future for semiconductor applications as well as their increasingly shrinking scale, increasing power and multiple capabilities is still in early days. Think for a moment: the most recent automobiles models have semi-autonomous features such as collision avoidance, lane keeping and some will even parallel park without driver assistance! Semiconductors in robotic applications are replacing manual labor at a frightening pace. Even seemingly mundane, everyday appliances like refrigeration, coffee makers, food processors and the like all rely on chips embedded somewhere in the works. In fact, it's fair to say that few people might have envisioned the astonishing capabilities of mobile smart devices, say just ten years ago, all made possible with equally astonishing advancements in semiconductor technologies. The point of the matter is this. Your portfolio would benefit from holding some type of semiconductor related asset. Now, if you simply don't have the time, the expertise nor the inclination to do your own stock picking then the logical choice is a semiconductor ETF.

One in particular, the SPDR S&P Semiconductor ETF (NYSEARCA:XSD) covers the entire S&P semiconductor subsector via the S&P Semiconductor Subsector Index. According to S&P Dow Jones Indices:

"... S&P Select Industry Indices are designed to measure the performance of narrow GICS® sub-industries. The Index comprises stocks in the S&P Total Market Index that are classified in the GICS semiconductor sub-industry..."

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Performance

1 Month

Quarter to Date

Year to Date

1 Year

3 Year

5 Year

10 Year

Since 1/31/2006 Inception

Market Value

7.25%

2.04%

4.10%

-0.67%

19.42%

9.38%

6.93%

5.96%

NAV

7.19%

2.01%

4.04%

-0.68%

19.41%

9.37%

6.92%

5.95%

S&P Semiconductor Select Industry Index

7.25%

2.08%

4.17%

-0.41%

19.75%

9.57%

6.98%

6.02%

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Data from SSGA

The fund's total net assets are just over $193 million with 4.4 million shares outstanding; the three month average trading volume is 68,809 shares, so the liquidity is pretty good in order to dollar-cost-average-build a position. This is one of the more established semiconductor subsector ETFs having first traded in January of 2006. As the table and chart demonstrates, the fund has performed well, if not evenly, since the inception date. Also the fund has had steady distributions throughout its entire ten year history but be aware that this is not a fund for dividends but rather capital appreciation over time. With that in mind, it should be mentioned that the gross expense ratio is below industry average at 0.35% and over the past two quarters the fund has traded in a small band about zero of its net asset value; hence it'll be difficult to pick entry points at a discount to NAV. Lastly, there's open option interest on this fund for those familiar with option trading strategies; for example selling, as deep as practicable out-of-the-money calls to enhance your total return or perhaps setting up entry points by selling puts at the lower end of standard Bollinger Bands.

The fund has just 41 semiconductor holdings with market capitalizations ranging from just $516 million to $142 billion.

Large Cap 35.96944%

Total Weight

Market Cap (in USD Billions)

Dividend

Yield

Earnings Per Share

Revenue Per Share

Institutional Interest

Intel Corp

(NASDAQ: INTC)

2.804699%

$142.370

$1.04

3.47%

$2.34

$11.88

67.00%

QUALCOMM

(NASDAQ: QCOM)

3.036162%

$80.090

$2.12

4.02%

$3.17

$14.69

82.10%

Texas Instruments

(NYSE: TXN)

3.064269%

$58.780

$1.52

2.62%

$2.87

$12.60

87.20%

Broadcom

(NYSE: AVGO)

2.876646%

$57.290

$1.96

1.36%

$4.89

$25.83

95.00%

NVIDIA

(NASDAQ: NVDA)

4.063793%

$24.140

$0.46

1.06%

$1.17

$9.56

87.50%

Analog Devices

(NYSE: ADI)

2.992745%

$17.530

$1.68

3.02%

$2.15

$10.98

88.30%

Skyworks Solutions

(NASDAQ: SWKS)

2.588357%

$12.280

$1.04

1.64%

$5.14

$17.86

74.80%

Xilinx

(NASDAQ: XLNX)

2.814441%

$11.350

$1.32

3.00%

$2.05

$8.61

94.40%

Micron Technology

(NYSE: MU)

2.657622%

$11.200

$0.00

0.00%

$0.96

$13.06

91.80%

Linear Technology

(NASDAQ: LLTC)

3.026276%

$10.890

$1.28

2.85%

$2.02

$5.84

90.00%

Microchip Technology

(NYSE: MCHP)

2.944866%

$10.430

$1.44

2.98%

$1.49

$10.69

98.80%

Maxim Integrated Products (NASDAQ: MXIM)

3.096944%

$10.360

$1.20

3.35%

$0.81

$7.76

92.80%

Averages

$37.226

$1.26

2.45%

$2.42

$12.45

87.48%

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Data from SSGA

Large caps comprise just under 40% of the fund including the dominate industry companies, most notably Intel with its $142 billion market cap, 3.47% yield and nearly $12 per share revenue. Intel is followed by Qualcomm with its $80 billion market cap and 4.00% yield and then Texas Instruments with a nearly $60 billion market cap and 2.62% yield. In fact, every one of the 12 holdings in the large cap group is a recognized name brand and industry leader. The smallest market cap in the group is that of Maxim Integrated Products at just over $10 billion with a 3.35% yield.

The average market large cap holding is just over $37 billion with an average yield of 2.45%, average earning per share of $2.42 and average revenue per share of $12.45.

Mid Cap 42.075222%

Total Weight

Market Cap

(in USD Billions)

Dividend

Yield

Earnings Per Share

Revenue Per Share

Institutional Interest

Qorvo Inc.

(NASDAQ: QRVO)

2.916118%

$6.380

$0.00

0.00%

-$0.20

$18.39

89.40%

Marvell Technology Group (NASDAQ: MRVL)

2.845414%

$5.140

$0.24

2.45%

-$0.72

$5.79

75.80%

First Solar

(NASDAQ: FSLR)

2.012110%

$4.910

$0.00

0.00%

$7.60

$39.09

57.20%

ON Semiconductor

(NYSE: ON)

2.931593%

$3.810

$0.00

0.00%

$0.44

$8.27

100.00%

Microsemi Corp

(NASDAQ: MSCC)

2.696556%

$3.670

$0.00

0.00%

-$1.52

$14.45

99.00%

Advanced Micro Devices (NYSE: AMD)

4.497304%

$3.070

$0.00

0.00%

-$0.75

$4.82

43.30%

Cypress Semiconductor (NYSE: CY)

3.254585%

$3.020

$0.44

4.66%

-$0.71

$5.46

92.30%

Integrated Device Technology

(NASDAQ: IDTI)

3.142708%

$2.980

$0.00

0.00%

$1.32

$4.88

100.00%

Cavium

(NASDAQ: CAVM)

2.205828%

$2.710

$0.00

0.00%

-$0.13

$7.36

100.00%

Monolithic Power Systems (NASDAQ: MPWR)

3.052014%

$2.580

$0.80

1.27%

$0.96

$8.67

98.20%

Synaptics Inc

(NASDAQ: SYNA)

2.232370%

$2.380

$0.00

0.00%

$2.89

$49.48

100.00%

Cree

(NASDAQ:CREE)

2.263681%

$2.310

$0.00

0.00%

-$0.96

$15.60

96.20%

Fairchild Semiconductor (NYSE: FCS)

3.238810%

$2.280

$0.00

0.00%

-$0.01

$11.71

100.00%

SunPower Corp

(NASDAQ: SPWR)

1.966893%

$2.200

$0.00

0.00%

-$1.93

$11.17

35.30%

Cirrus Logic

(NASDAQ: CRUS)

2.819238%

$2.100

$0.00

0.00%

$1.87

$18.50

84.40%

Averages

$3.303

$0.10

0.56%

$0.54

$14.91

84.74%

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The mid cap holdings, just over 42% of the fund, are no less impressive when it comes to name brand recognition, however, there's a bit more risk and far less yield in the mid-cap holdings when compared to their large cap counterparts. For examples, Marvell Technology Group has a market cap of just over $5 billion, clearly nothing to scoff at, but no yield and recent negative earnings per share in spite of $5.79 in revenue per share. Similarly Qorvo with a $6.38 billion market cap manages over $18 revenue per share but negative EPS. In fact, of the 15 mid cap holdings, 9 have recent negative EPS. This is not to say that these are bad holdings, just that they're competing almost head-to-head against the giants of the semiconductor subsector. On the other hand, the institutional interest in this group is about the same as the large caps. The hidden value in this group is in the potential for consolidation through merger and acquisition. Keep in mind that many of these companies have spent time, effort and treasure to protect proprietary technology and patents; patent rights are the hidden treasure of the semiconductor industry. Investors should make particular note of this since corporate bond rates are near historic lows and thus the leverage for M&A.

It should be noted that although fund holding First Solar provides solar energy solutions, it also specializes in the manufacturing of silicon modules for their solar systems. Similarly, SunPower provides residential and commercial systems but also manufactures the components. So although not 'pure-plays' they do earn their place in the specialized semiconductor subsector.

The average mid-market cap holding is $3.3 billion, with 0.56% yield, an average $0.54 earnings per share and average $14.91 revenue per share.

Small Cap 22.062843%

Weight

Market Cap

(in USD Billions)

Dividend

Yield

Earnings Per Share

Revenue Per Share

Institutional Interest

Silicon Laboratories (NASDAQ: SLAB)

2.103858%

$1.960

$0.00

0.00%

$0.68

$15.27

-1.00%

M/A-COM Technology Solutions

(NASDAQ: MTSI)

2.363304%

$1.900

$0.00

0.00%

$0.68

$8.86

66.90%

Intersil Corp Class A (NASDAQ: ISIL)

2.064006%

$1.700

$0.48

3.94%

$0.66

$3.90

95.40%

Semtech Corp

(NASDAQ: SMTC)

1.714859%

$1.380

$0.00

0.00%

$0.17

$7.47

100.00%

Power Integrations (NASDAQ: POWI)

1.480668%

$1.380

$0.52

1.12%

$1.14

$12.02

100.00%

Rambus

(NASDAQ: RMBS)

1.794638%

$1.280

$0.00

0.00%

$1.76

$2.61

73.00%

MaxLinear Class A

(NYSE: MXL)

2.764549%

$1.220

$0.00

0.00%

-$0.31

$6.18

76.30%

Inphi Corp

(NASDAQ: IPHI)

3.015846%

$1.140

$0.00

0.00%

-$0.09

$6.50

95.10%

Diodes Inc

(NASDAQ: DIOD)

0.717845%

$0.861

$0.00

0.00%

$0.22

$17.89

76.20%

Lattice Semiconductor (NASDAQ: LSCC)

2.606430%

$0.635

$0.00

0.00%

-$1.07

$3.51

86.40%

CEVA

(NASDAQ: CEVA)

0.749597%

$0.535

$0.00

0.00%

$0.37

$3.03

92.00%

Applied Micro Circuits Corp

(NASDAQ: AMCC)

0.687243%

$0.516

$0.00

0.00%

-$0.39

$1.93

81.00%

Averages

$1.209

$0.08

0.42%

$0.32

$7.43

78.44%

Click to enlarge

Data from SSGA

The small cap holdings comprise the least of the fund's capital allocation at just over 22%. There are a few notable names such as the well-known mixed signal, integrated circuit manufacturer Silicon Labs , memory manufactured Rambus and programmable logic device manufacturer, Lattice Semiconductor. Surprisingly, of the 12 small cap holdings only 4 have reported recent negative EPS. The average small cap yield is 0.42% with an average revenue per share of $7.43 and an average institutional interest of 78.44%. It's worth mentioning again, that the hidden value in these smaller companies will likely be through M&A, and then for the quick acquisition into other markets or for patent rights.

Summary

Market Cap

(in USD Billions)

Dividend

Yield

Earnings Per Share

Revenue Per Share

Institutional Interest

Year over Year Quarterly

Revenue Growth

Averages

$13.096

$0.45

1.10%

$1.05

$11.85

83.64%

12.64%

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In summary , the average market cap tends to the large cap size at $13.096 billion with an average yield of just 1.10%, an average earnings per share of $1.05, average revenue per share of $11.85 and an 12.64% average year-over-year quarterly revenue growth. Institutions seem willing to risk investment in these companies to an average of almost 84%.

The U.K. referendum vote to exit the EU might result in a slowing of the European economy at a time when GDP was just barely gaining traction; a recession is an increasing possibility. China's transition to a more market base economy is having a negative effect in the Asia Pacific, particularly with their largest trading partners, Japan and Korea, both of whom have large semiconductor industries. Hence, even if North America isn't too affected by these global economic transitions, per se, the current state of the semiconductor industry might shift causing supply-demand imbalances, thus lower revenues, globally.

Technology, in general, is a volatile sector and there are likely to be some volatile swings. The individual investor should view any correction as an opportunity. That, together with dividend reinvestment and a steady dollar cost averaging discipline will lead to an advantage as global economies regain their footing and global GDP accelerate. Semiconductors are here to stay and their potential to create more efficiencies is immeasurable. The dislocations created by automation are no different than the dislocations created by any other technology at any other time in history. Eventually, a new economy will emerge from any global rebalancing and the semiconductor industry will play a key role in it for decades to come.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: CFDs, spread-betting and FX can result in losses exceeding your initial deposit. They are not suitable for everyone, so please ensure you understand the risks. Seek independent financial advice if necessary. Nothing in this article should be considered a personal recommendation. It does not account for your personal circumstances or appetite for risk.