You Should Add To iShares Semiconductor ETF On Every Dip
- Semiconductors are in high demand right now.
- The current shortage will end in the short term.
- Investors should invest in the industry for the future prospects.
The new Omicron variant is challenging the American and International economies. Countries have started limiting traveling again, and we see European countries like Austria and Germany imposing or consider imposing vaccine mandates as they quarantine their unvaccinated population. The fear of another massive outbreak in the winter fueled by a new variant has sent the markets downward.
While it seems like the Omicron is not going to be a game-changer it returned some humility to the markets as investors had to deal with much higher volatility. However, investors should take into account that the level of uncertainty regarding the new variant will not diminish until we know more clearly how effective the vaccines are against it.
As an investor, I am always looking for the right way to take advantage of the stock market volatility. Sometimes we see a certain company drops or a certain industry. At other times we see the entire market being sold, and this is where most opportunities show up. Even when there is a crisis, it doesn't hurt every sector the same.
One of the sectors that I believe is interesting is the semiconductors sector. The sector is poised to enjoy a growth in demand while right now the supply chain challenges are only increasing demand and prices. Covid has a limited effect on the demand for semiconductors, as the digital transformation accelerated by the pandemic requires more semiconductors.
According to Seeking Alpha, iShares Semiconductor ETF (NASDAQ:SOXX) invests in American stocks of companies operating across information technology, semiconductors, and semiconductor equipment sectors. The fund invests in growth and value stocks of companies across diversified market capitalization. It seeks to track the performance of the ICE Semiconductor Index.
The first reason is a short-term reason and it is the shortage of semiconductors. The pandemic has had its toll on the worldwide supply chain, and while demand for digital devices increased, closed plants created an extremely long line. This shortage is affecting even the largest companies that rely on semiconductors like Apple (AAPL).
In the long term, we have two trends that will fuel growth in demand for semiconductors. The first trend is the increase in the number of connected devices. Devices that we never anticipated seeing connected to the internet are now connecting as a default. Washing machines, ovens, and dishwashers together with connected cars will keep driving the IoT trend forward.
Not only that we see an increase in the number of connected cars per capita, but we also start seeing an increase in the world population with access to smart devices. As the world's middle class is constantly growing more people will use connected devices, and each person will have more devices. As people become wealthier their demand for semiconductors will increase dramatically.
In addition, the semiconductors index and SOXX in particular have a great track record. If you invested in the index in the last decade you achieved a CAGR of 27% easily outpacing the broader market returns. I believe that the trends I described above will continue to increase the demand and the whole semiconductors market, and therefore I believe that investors should expect decent returns in the long term.
Semiconductors are used in almost every industry and the need is growing. Covid may interfere with our movement, but we still work, do dishes, cook and communicate. All of these daily activities require semiconductors in today's world when even our dishwasher is connected to the internet as part of the IoT trend.
The ability of Covid to affect the demand for semiconductors is limited. If we were talking about another similar outbreak as we have seen in the first wave, then we could see lower demand for products, which in turn would turn into lower demand for semiconductors in these products. As we have vaccines and even treatment, the effect of Covid should be less meaningful and so is the effect on the industry.
The digitalization of the world requires semiconductors. If Covid disappears today, we still have IoT, connected cars, and digitalization as growth prospects for the industry. The industry may find even higher demand due to Covid as more companies try to accelerate their digital transformation.
The largest holding is Nvidia (NVDA) which operates as a visual computing company worldwide. It offers GeForce GPUs for gaming, GRID software for cloud-based visual and virtual computing, and automotive platforms for infotainment systems. It also capitalizes on the growth in data centers usage using its acquisition of Mellanox, and the chips it creates for data centers.
The second-largest holding is Broadcom (AVGO) that I wrote about several weeks ago. Broadcom designs, develop and supply semiconductor infrastructure software solutions. It offers semiconductor devices for some very high-demand industries. The Wi-Fi 6, 5G, and GPS are trends that increase the demand for Broadcom's products.
The third-largest holding is Intel (INTC). Unlike the first two that showed significant growth, Intel is the free cash flow queen. It is working on new technologies to keep growing, and in the meantime provides a reliable dividend and an attractive valuation. The company sells semiconductors for cloud, smart, and connected devices for retail, industrial, and consumer uses worldwide.
The semiconductors industry is attractive as it produces very unique and critical parts for our everyday life. The sector has grown significantly over the last decade, and the trends that pushed this growth are not going to disappear anytime soon.
You should consider buying SOXX on every dip, as the number of people using connected devices is growing and so is the number of devices each of us own. Therefore, every dip due to Covid fears in the price of SOXX can be a great time to add as investors are willing to capitalize on the digitalization of the world.
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of AAPL, SOXX either through stock ownership, options, or other derivatives. 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.
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