Technology is the best-performing sector in the S&P 500 this year thanks to a big assist from semiconductor stocks. Various semiconductor exchange traded funds tell the tale of the tape. For example, the iShares PHLX Semiconductor ETF (SOXX) is up more than 36 percent year-to-date.
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Heading into the end of 2017 and early 2018, some market observers are voicing concerns about semiconductor demand trends, noting that robust demand will be hard to keep up through 2018. However, some analysts are bullish on chip stocks and ETFs.
Angelo Zino, CFRA technology equity analyst, sees orders improving in the second half of 2017 and in 2018 as next-generation product launches support higher wireless demand, said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a recent note. While he expects secular declines to persist in the PC space, he sees an aging infrastructure supporting more modest declines going forward.
Rival Chip ETFs
The $1.3 billion SOXX holds 30 stocks and has been boosted in large part by NVIDIA Corporation (NVDA). That high-flying chip stock is the largest holding in SOXX at 8.5 percent of the fund's weight. Texas Instruments Incorporated (TXN) and Intel Corporation (INTC) combine for 16.5 percent of the fund's weight.
The VanEck Vectors Semiconductor ETF (SMH) is the primary rival to SOXX. Up 36.3 percent, SMH allocates over 10 percent of its weight to Taiwan Semiconductor Ltd (TSM), exposing the ETF to smartphone demand trends as Taiwan Semiconductor is a major Apple Inc. (AAPL) supplier.
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Zino thinks the communications and consumer end markets will remain healthy despite periods of lumpiness, as carrier comments in China suggest to him an improved spending outlook for 2018 as well as continued growth in smartphones, said Rosenbluth.
CFRA has an Overweight rating on Taiwan Semiconductor.
Other Drivers Of Demand
Other parts of the semiconductor market could buoy the aforementioned ETFs heading into 2018.
CFRA also sees continued growing demand for NAND flash memory equipment, primarily reflecting the rising trend of greater memory content per smartphone and the ongoing adoption for solid-state devices, said Rosenbluth. In addition, technology investments related to 3D NAND should provide a boost to spending demand conditions.
CFRA has a Market Weight rating on SOXX and an Overweight rating on SMH. Investors have added nearly $54 million on a combined basis to SOXX and SMH in the fourth quarter.
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