Play A Rebound in 2013 With This Chip Stocks ETF

2012 has been a mediocre year for some marquee semiconductor stocks. Shares of Intel INTC, the largest chip maker, are positive by less one percent on a year-to-date basis. Texas Instruments TXN is off by nearly two percent. Qualcomm QCOM is far better with a gain of 10.7 percent, but all three lag the 21.8 percent year-to-date gain offered by the PowerShares QQQ QQQ, the Nasdaq 100 tracking ETF. S&P Capital IQ has a neutral view of the semiconductor sector, saying "we expect weak economic conditions to lead to a flat year, plus or minus 3%, in 2012, and mid- to high single digit growth in 2013." Amid a sluggish global economic environment, S&P said it sees softening demand for personal computers and consumer electronics, two of the major end markets for chip manufacturers. Not surprisingly, semiconductor ETFs have not thrilled investors this year. The SPDR S&P Semiconductor ETF XSD is up just 1.1 percent while the iShares PHLX SOX Semiconductor Sector Index Fund SOXX is higher by 7.6 percent. SOXX and XSD are vastly different products, a fact that underscores the tepid performance of the chip group at large in 2012. With $206.1 million in assets under management, SOXX is heavily allocated to more familiar semiconductor names such as Applied Materials AMAT, Broadcom BRCM, Taiwan Semiconductor TSM, Intel and Texas Instruments. Those five names combine for about 39 percent of the ETF's weight. On the other hand, no stock accounts for more than 3.48 percent of XSD's weight. The ETF's top-10 holdings are comprised of more speculative names such as First Solar FSLR, Cree CREE and Linear Technology LLTC, among others. The potential problem for investors looking for chip exposure is broad-based weakness throughout the sector. "We believe PC-related spending is most at risk relative to current expectations," S&P said in a research note. "We think the slightly weakened enterprise market will remain weak but fairly stable around current levels. We see carrier spending increasing in the second half versus the first based on select carrier spending comments. Lastly, a downside surprise could come in handsets, which have been stronger due to the success of Apple and Samsung, but an inventory correction could be in the offing as the rest of the group's market share continues to erode. All of this is against a backdrop of the proliferation of semiconductors across a range of electronic products and markets." S&P did note that investors looking to play a possible rebound in semiconductor names next year should look to the Market Vectors Semiconductor ETF SMH, which S&P rates Market-weight. Intel dominates SMH with a weight in excess of 18 percent while Taiwan Semiconductor chimes in at 13.5 percent. Texas Instruments, Broadcom and Altera ALTR combine for over 16 percent of SMH's weight. "Within SMH, it's worth noting that Broadcom is our top semiconductor pick," S&P said in the note. "We believe it sits at the intersection of wireless connectivity growth for all types of mobile devices. Its leadership in connectivity, or "combo chips," i.e., those that contain cellular, Bluetooth, GPS and radio technology, gives the company an advantage as smartphones and tablets gain in popularity. However, the ETF's largest holding is Intel. Given the current macro weakness, we believe growth for Intel will be based on the success of its new Ultrabooks platforms and uptake of Microsoft's Windows 8 platform. Over the long term, we think emerging market PC penetration represents its largest growth opportunity." For more on ETFs, click here.