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Chips On The Table: An Aggressive Semiconductor Idea

ETF Professor

Semiconductor stocks are big reasons why the technology sector is performing so well this year. Just look at the PHLX SOX Semiconductor Sector Index. That widely followed gauge of semiconductor equities is up nearly 32 percent this year.

Actually, the PHLX SOX Semiconductor Sector Index has nearly doubled over the past two years. While that is an impressive run for chip stocks since the start of 2016, some signs point to more muted returns in 2018.

“Despite a recent sell-off, the Philadelphia Semiconductor Index is up 92 percent since the beginning of 2016 and is poised to beat all 11 S&P sectors for a second consecutive year, fueled by earnings growth and an unprecedented period of consolidation,” reports Bloomberg. “While the streak hasn’t quite turned analysts bearish, some are advising investors to be selective with their picks and vigilant for signs of slowing demand and rising inventory levels.” 

Preparing For A Pullback

Under no circumstances should a leveraged exchange traded fund (ETF) be used as a long-term investment, but there are ideas for aggressive traders looking to exploit potential pullbacks in semiconductor stocks in 2018. The Direxion Daily Semiconductor Bear 3X Shares (NYSE: SOXS) is one of those ideas.

The Direxion Daily Semiconductor Bear 3X Shares is designed to deliver triple the daily inverse returns of the aforementioned PHLX SOX Semiconductor Sector Index. Said another way, SOXS has been drubbed in 2017, proving that leveraged ETFs should not be held for more than a few days.

Venerable semiconductor names Intel Corp. (NASDAQ: INTC), Texas Instruments Inc. (NASDAQ: TXN) and Nvidia Corp. (NASDAQ: NVDA) combine for almost a quarter of the index SOXS tracks. Those stocks are up an average of 52 percent in 2017.

Still Fine

While investors should not expect a repeat of 2016 and 2017 for semiconductor stocks, that does not mean 2018 will be forgettable for the group.

“It’s unlikely that 2018 growth will be as strong as 2017 but the semiconductor sector will be fine as long as the demand cycle continues; in this environment, investors should own stocks with 'structural or secular components to the story' that can work well in a cyclically strong environment and potentially offer some relative protection if the market turns,” said Bernstein in the Bloomberg article.

Tactical semiconductor bulls can consider SOXS' bullish counterpart, the Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL). SOXL is designed to deliver triple the daily returns of the PHLX SOX Semiconductor Sector Index. 

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