Here's Why Semiconductor ETFs Are Looking Attractive For Q2

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The semiconductor market is experiencing expanding demand with increasing digitization and growing dependency on the Internet owing to some new normal trends like online shopping, work from home, digital payments, digitization of healthcare, growing favor for video gaming and many more.

Growing automotive sales are also driving semiconductor demand due to the increasing utilization of chips in electronic components of vehicles. Robust demand for electric vehicles (EVs) and plug-in hybrids also deserve a mention here. Markedly, EVs require complex electronic systems composed of advanced semiconductors. Furthermore, the increased deployment of 5G technology — the next-generation wireless revolution — is likely to support growth.

According to the latest data from the Semiconductor Industry Association (or SIA), global semiconductor sales rose to $39.6 billion in February, jumping 14.7% on a year-over-year basis, per a Design And Reuse article. However, it declined a nominal 1% from January’s total of $40 billion. Regionally, year-over-year sales rose across all major markets. Sales in Asia Pacific/All Other grew 18.2%, while in China it jumped 18.9%, followed by 9.7% in Americas, 7.6% in Japan and 6.8% in Europe. On a month-over-month basis, sales increased 0.8% in Europe and 1.5% in Asia Pacific/All Other.

In this regard, John Neuffer, SIA president and CEO, said that “global semiconductor sales during the first two months of the year have outpaced sales from early in 2020, when the pandemic began to spread in parts of the world. Sales into the China market saw the largest year-to-year growth, largely because sales there were down substantially early last year,” as stated in a Design And Reuse article.

Factors Driving Demand

It is worth noting here that strong adoption of gaming, wearables, drones and VR/AR devices is fuelling significant growth in the semiconductor arena. Moreover, growing adoption of cloud computing and the ongoing infusion of AI, machine learning and IoT are expected to keep the sector brewing with opportunities in 2021.

Furthermore, the coronavirus-induced work-from-home and web-based learning trends have spurred demand for chips from PC manufacturers and data-center operators. Data-center operators have increased their capacities to meet the surging demand for cloud services. The companies that provide design and other components for chip making are expected to gain from this trend.

The increasing importance of Hybrid cloud among enterprises is attracting investments from large public cloud providers, including Amazon Web Services, Microsoft Azure, Google Cloud, International Business Machines and Oracle. The data-center chip providers will likely gain from this trend.

An accelerated coronavirus vaccine rollout, introduction of another round of fiscal stimulus and the reopening of U.S. economy may lead to faster U.S. economic recovery from the coronavirus pandemic-led economic slowdown.

Encouragingly, President Joe Biden aims to distribute 200 million coronavirus vaccines within his first 100 days since joining office, per a CNBC article.

On March 31, Biden unveiled his $2.3-trillion infrastructure development plan that focuses on improving American infrastructure. The proposal includes around $50 billion for the American semiconductor industry in an attempt to address the worldwide shortage of chips, per the verified sources. The plan also sets aside an amount of $174 billion to boost the EV market.

Semiconductor ETFs Poised to Gain

According to  World Semiconductor Trade Statistics (WSTS) data, the global semiconductor market is now projected to rise 8.4% in 2021, based on double-digit growth of memory and optoelectronics. The forecast for 2021 is higher than the previously-projected growth of 6.2%, made by the WSTS in July.

Investors seeking to make the most of the surging space in a diversified way could consider the following ETFs.

iShares PHLX Semiconductor ETF (SOXX)

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 firms. The fund has amassed $6.96 billion in its asset base and trades in three-months average volume of around 1.3 million shares. It charges 46 basis points (bps) in fees a year from investors. It flaunts a Zacks ETF Rank #1 (Strong Buy), with a High-risk outlook (read: Will Fidelity's Bitcoin ETF See the Light of Day?).

VanEck Vectors Semiconductor ETF (SMH)

This fund provides exposure to 25 securities by tracking the MVIS US Listed Semiconductor 25 Index. The product has managed assets worth $5.36 billion and charges 35 bps in annual fees and expenses. It trades with three-month average volume of 4.4 million shares. The fund carries a Zacks ETF Rank #2 (Buy), with a High-risk outlook (read: U.S. Manufacturing Best Since 1983: ETFs to Win).

First Trust Nasdaq Semiconductor ETF (FTXL)

This fund seek investment results that correspond generally to the price and yield, before the fund's fees and expenses, of an index called the Nasdaq US Smart Semiconductor Index. FTXL has accumulated $88.2 million in AUM. Average three-month trading volume is light at around 17,000 shares and expense ratio is 0.60%. FTXL has a Zacks ETF Rank #1 (read: Technology Regains Momentum: 5 ETFs Leading the Way).

Invesco Dynamic Semiconductors ETF (PSI)

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 31 securities in its basket. The product has AUM of $630.8 million and sees moderate average three-month trading volume of about 82,000 shares. Expense ratio is 0.57%. PSI sports a Zacks ETF Rank #1, with a High-risk outlook (read: Semiconductor ETFs Up At Least 40% in 2020: More Gains Ahead).

SPDR S&P Semiconductor ETF (XSD)

This fund tracks the S&P Semiconductor Select Industry Index. The fund has AUM of $1.03 billion and average three-month trading volume of about 155,000 shares. It charges 35 bps in fees per year. The product flaunts a Zacks ETF Rank #1, with a High-risk outlook.

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