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Will Semiconductor ETFs Repeat This Year's Success in 2017?

Sanghamitra Saha

Semiconductor ETFs have had a great 2016 having returned in the range of 35–46% (as of December 22, 2016) and breezing past about 14% gains witnessed by the broader technology fund SPDR Technology Select Sector XLK. The space had a tough time in 2015 thanks to a struggling PC market.

What Made Semis Winners in 2016?

However, things turned around this year on decent earnings, consolidation activities and emerging technologies. Semiconductor, the value-centric traditional tech area, managed the steep correction in the market better than other high-growth tech investments, in the initial phase of 2016. This is because, value-oriented trading has been in focus in 2016 thanks to a pile of uncertainties.

Also, this tech sub-sector also saw strong demand for its products in emerging technology applications like tablets and smartphones despite still-subdued PC shipments. Moreover, the semiconductor space is consolidating rapidly with a number of deals announced lately (read: Time to Buy Semiconductor ETFs on Qualcomm-NXP Deal?).

As a result, global semiconductor sales touched $88.3 billion in Q3, representing the industry’s highest-ever quarterly sales and an uptick of 11.5% compared to the previous quarter. Sales in China witnessed a marked improvement.

What Lies Ahead?

Though tech stocks fell into the questionable category since Donald Trump’s win due to his proposed stricter steps on immigration and outsourcing, semiconductors should sail through on increasing demand for wearables, VR headsets, drones, and virtual reality devices (read: 4 Tech ETFs Losing the Least in Thursday's Brutal Trading).

Also, the Internet of Things (IoT) has received a lot of attention over the past few years. With this, semiconductor companies will step beyond the otherwise-saturating smartphone market and enter a rapidly growing arena.

“IoT has enormous potential for data generation across the roughly 21 billion endpoints expected to be in use in 2020” and “by 2022, IoT will save consumers and businesses $1 trillion a year in maintenance, services and consumables,” as per Gartner (read: Invest in the Internet of Things with This ETF).

If this was not enough, the World Semiconductor Trade Statistics (WSTS) expects growth to embrace the semiconductor industry in 2017 and 2018 after a ‘stable’ 2016. All key product categories and geographies are estimated to be up in 2017 and 2018 leading the semi market to 3% and 2% expansion, respectively.

Investors should also note that semi ETFs like Dynamic Semiconductors PowerShares PSI and iShares PHLX Semiconductor SOXX hit a 52-week high on December 22, 2016. After all, the holiday season has reached its peak with digital shopping getting considerable prominence. According to a survey conducted by Piper Jaffray, iPhone was the first choice of consumers as the holiday gift this year (read: 5 Hot Tech ETFs to Buy for Christmas).

Several last-minute shoppers are still eyeing December 23 to pick up stuff for Christmas. Investors should note that Amazon will begin its year-end sale from December 23 this time. So one can clearly understand that digital shopping and its impact on semiconductor demand still has a long way to go.

So, stay tuned to see a great 2017 for semiconductor ETFs like PSI, SOXX and VanEck Vectors Semiconductor ETF SMH. If we go by technical indicators, the trend looks supportive. SOXX, PSI and SMH have a positive weighted alpha of 45.20, 52.10 and 39.90.

Since a positive weighted alpha hints at more gains, there is definitely some promise for investors who want to ride these surging ETFs further in the initial phase of 2017.

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SPDR-TECH SELS (XLK): ETF Research Reports
ISHARS-PHLX SEM (SOXX): ETF Research Reports
PWRSH-DYN SEMI (PSI): ETF Research Reports
VANECK-SEMICON (SMH): ETF Research Reports
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