The semiconductor industry – often regarded as the backbone of technological advancement – has performed exceptionally well this year. Strong demand for semiconductor products from all around the globe led this sector to be a hot play in 2014.
Not only have semiconductor companies outperformed within the technology space, they have even surged ahead and are the top performers in the overall U.S. equity markets (read: Top Performing US Sector ETF in Focus: XSD).
Semiconductor Industry in Focus
The semiconductor industry serves as a driver, enabler and indicator of technological progress. Semiconductors are in almost all the devices we use from smartphones, tablets, LEDs to cars.
The fabless semiconductor industry is believed to be the main driving force for the success of this industry. Also, with environmental issues becoming a prime concern, semiconductor devices are being made to reduce power consumption, lower heat dissipation, create more efficient lighting solutions and so forth.
Global sales of semiconductors touched $78.47 billion during the first quarter of this year – the highest revenue generated ever in just three months of a year.
Also, worldwide sales of semiconductors reached $26.86 billion for the month of May 2014, up 8.8% year over year, as per a report by the Semiconductor Industry Association (:SIA). May sales marked the third-highest month in the history of the semiconductor market, after touching new highs last year, as per an article by Forbes.
Semiconductor companies are expected to continue minting money for investors. Global industry sales are expected to grow 6.5% this year, with total revenues hitting the $325 billion mark, as per the SIA. Companies within this space are expected to report a 34% jump in profits in 2014, as per a Bloomberg article.
Given the bright prospects for semiconductors, it makes sense for investors to tap this top performing U.S. sector. While investing in individual stocks could be an option, a more convenient way to invest in semiconductor stocks is to do it in basket form.
Thus a look at the top ranked semiconductor ETF could be a good way to target the best of this segment (read: A Comprehensive Guide to Semiconductor Industry ETFs).
About the Zacks ETF Rank
The Zacks ETF Rank provides a recommendation for the ETF in the context of our outlook for the underlying industry, sector, style box or asset class.
The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of five ranks within each risk bucket. Thus, the Zacks ETF Rank reflects the expected return of an ETF relative to other products with a similar level of risk.
For investors seeking to apply this methodology to their portfolio in the Technology space, we have taken a closer look at the top ranked Market Vectors Semiconductor ETF (SMH). This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ and is detailed below (see: all the Top Ranked ETFs).
SMH in Focus
Launched in December 2011, SMH is a popular and actively traded fund within its space managing an asset base of $353.9 million.
The fund tracks the Market Vectors US Listed Semiconductor 25 Index, holding a small basket of just over two dozen stocks. Large cap stocks dominate the fund, forming three-fourths of the total allocation, followed by mid caps, while small caps have almost negligible exposure.
The fund does have some concentration risk as the top two holdings – Intel and Taiwan Semiconductor Manufacturing – have a huge exposure, forming roughly 40% of the total assets. Apart from these two, none of the stocks have more than 5.2% exposure in the fund.
Country-wise, U.S. semiconductor companies have the highest exposure in the fund (71%), with Taiwan (16.2%), the Netherlands (8.7%) and United Kingdom (4.4%) rounding off to the next three spots.
SMH is one of the low-cost options available in the space charging 35 basis points a year and has an average daily volume of more than 1.5 million shares (read: Broadcom A Rising Star: 2 ETFs to Pick).
Performance-wise, the fund has a good track record of delivering solid returns. While it has gained 19.5% in the year-to-date frame, it has returned a compounded 60% in the past three years and a whopping 145% in the past five years.
Given the solid fundamentals in the space, the fund’s good performance track record and its top Zacks ETF Rank, SMH is clearly poised to continue its winning streak. Hence, investors can surely consider adding this top ranked fund to their portfolios.
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