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Semiconductor ETFs Are Important Indicators

This article was originally published on ETFTrends.com.

Over the course of market history, different industries have taken turns being important tells regarding broader market health. These days, some market observers believe semiconductor stocks and the related exchange traded funds are those tells.

The good news in that scenario is that semiconductor stocks are enjoying their best first quarter on record. Entering Wednesday, the Invesco Dynamic Semiconductors ETF (PSI) , SPDR S&P Semiconductor ETF (XSD) , iShares PHLX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH) each sported year-to-date gains of more than 20%.

“Semis are the transports of the 21st century. … It involves every aspect of the economy, especially the digital economy,” said Bespoke Investment Group co-founder Paul Hickey in a CNBC interview.

Semiconductor have exhibited high sensitivity to the trade war because China is a strong driver for the chip-making sector, which includes several fast areas of growth including gaming and artificial intelligence. If the trade war is renewed, the barriers will raise costs for many of these multi-national companies.

Semiconductor ETFs Hoping For More Good Times

“Semiconductors, often the first step in the supply chain for the tech world, now act as a similar leading indicator to the Dow Transports, says Hickey,” reports CNBC. “A swing lower in the Dow Transportation index typically reflects slowing demand for freight and logistics services and signals an economic slowdown, so goes the 19th century Dow Theory. In Hickey's argument, a slowdown in chipmaker demand has implications for the modern-day economy.”

Semiconductor stocks slumped in the fourth quarter, chasing some investors from the group and they have yet to return. Data confirm some investors are missing out on the 2019 upside offered by semiconductor ETFs.

Investors have pulled nearly $90 million from SOXX and $233.29 million from SMH since the start of the year.

“As long as you continue to see that trend of outperformance continue, it bodes well for the broader market,” said Hickey in the CNBC interview. “And then when you start to see it falter, that's the time to maybe become a little bit more cautious. But at this point, the peaks aren't coincident with each other. Semis have been a clear leader."

For more information on the tech sector, visit our technology category.

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