Time to Buy This Top Ranked Semiconductor ETF?

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The semiconductor industry serves as the spine for global technological advancement. Though the technology sector at large has been broadly mixed so far this year due to uncertainty surrounding some of the top tech players, one sub-sector – semiconductors – has shown some resilience of late (The Comprehensive Guide to Semiconductor ETFs).

In fact, many semiconductor industries have recently experienced a spell of earnings driven upgrades in the Zacks Industry Rank, suggesting that the space is well-positioned for the near term. Statistics also bear out the relatively stable trend, especially when looking at top line growth in the sector.

According to World Semiconductor Trade Statistics (:WSTS) data, there should be positive worldwide semiconductor sales growth of 2.1% in 2013, following the 3.2% decline in 2012. Although the agency recently cut its estimate for chip sales, the data still confirms considerable year-over-year improvement. Another agency, Gartner, also foresees a decline in spending but a steady growth rate of 5.5% for 2013.

At present, positive movement in the book-to-bill ratio signals that spending for equipment will pick up later in the year, triggering gains in the space. As per SIA’s president, the semiconductor recovery will attain its peak later this year as consumption matches yield.

Some analysts expect sales from semiconductors to continue rising globally despite declining PC shipments given their requirement in emerging technology applications like tablets and smartphones (Read: Invest in Pockets of Semiconductor Strength).

Given this bullish trend, a look at some of the top ranked ETFs in the space could be a good way to target the best of the segment. One way to find a top ranked ETF in the semiconductor space is by using the Zacks ETF Ranking system.

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 (Read: Zacks ETF Rank Guide). Our proprietary methodology also takes into account the risk preferences of investors. ETFs are ranked on a scale of 1 (Strong Buy) to 5 (Strong Sell) while they also receive one of three risk ratings, namely Low, Medium or High.

The aim of our models is to select the best ETFs within each risk category. We assign each ETF one of the 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 semiconductor sector, we have taken a closer look at the top ranked SOXX. This ETF has a Zacks ETF Rank of 1 or ‘Strong Buy’ (see the full list of top ranked ETFs) and is detailed below:

About the SOXX ETF

Launched in July 2001, the iShares PHLX Semiconductor ETF (SOXX) is a passively managed ETF designed to provide broad exposure to the U.S. semiconductor sector. SOXX tracks the PHLX Semiconductor Sector Index.

The fund is a bit overlooked option among the technology ETFs with about $240.6 million in AUM. Holding 131 stocks in its basket, the product puts as much as 60.0% of its total assets in the top 10 holdings, suggesting pretty high company-specific risk.

Applied Materials Inc. (AMAT), Texas Instruments Inc. (TXN) and Intel Corp. (INTC) are its top three holdings with 7%–8% share each. Hence, any positive/negative headline in top holdings will heavily impact the fund.

In fact, a chain of negative news in Intel made trading difficult for semiconductor ETFs in early July (Read: INTC Drags Down Semiconductor ETFs), though good news out of other companies in the space—like from TXN—has balanced this out. As such, we have a ‘High’ risk outlook for SOXX in the near term.

This choice is an inexpensive one in the technology ETF space with around 48 bps of annual fees which is lower than the average expense ratio of the space. The fund is also liquid with a daily trading volume of around 200,000 which is on par with some asset-rich tech ETFs like Vanguard Information Technology ETF (VGT) and iShares Dow Jones US Technology (IYW) (read: The Top Choice in the Tech ETF World?).

Capitalization-wise, the fund is most exposed to large caps (about 55%) followed by mid (34%) and small cap (10%) stocks. The fund structure follows a blend style with around 51% of exposure. Growth stocks account for 36% of the investment. Greater exposure to large cap as well as blend style should call for lower volatility.

After witnessing a volatile tend in 2012, SOXX climbed in 2013, returning a robust 34.3% in the one-year period ending July 23rd, 2013 and about 26.0% in the year-to-date time frame. Over the last one-year period, the return from SOXX has handily outperformed the broad S&P 500 as well.

 

The product also pays an annual dividend yield of 0.83%. SOXX hit a low of $47.02 and a high of $67.01 in the last one year. The fund is currently hovering around its 52-week high price.

Bottom Line

Despite the fund’s heavy concentration risk, this semiconductor ETF could still be an intriguing choice for investors. Most of its underlying stocks are poised to outperform the broader market this earnings season, possibly extending gains for this top ranked fund into the fall.

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Read the analyst report on SOXX

Read the analyst report on AMAT

Read the analyst report on TXN

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