Nibbling At A Semiconductor ETF

Semiconductor stocks have been key contributors to the upside experienced by the broader technology sector this year, and some investors appear to be renewing their enthusiasm for chip-related exchange-traded funds.

Confirming the strength of semiconductor stocks, the VanEck Vectors Semiconductor ETF SMH is up 28.2 percent year to date, a performance that puts the dedicated chip ETF well ahead of diversified technology funds. SMH is up more than 6 percent over the past month, encouraging some investors to revisit the fund.

“However, we have seen some nibbling in the Semiconductor space via SMH,” said Street One Financial vice president Paul Weisbruch in a note out last Friday. “The fund has come in a bit off of its 52-week high registered on Wednesday of this week, but these inflows are very significant given the asset base in the fund.” 

What's Driving SMH

SMH holds just 26 stocks and the ETF is top heavy as just two stock — Taiwan Semiconductor Ltd. TSM and Intel Corporation INTC — combine for 23 percent of the ETF's weight. At the moment, SMH's strategy is not a drawback as Taiwan Semiconductor is up more than 31 percent year to date. The ETF's top 10 holdings combine for almost two-thirds of its lineup.

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After struggling to start 2017, shares of Intel appear to be on the mend as the semiconductor giant is up more than 7 percent over the past month. Nvidia Corporation NVDA, one of this year's top chip stocks, is SMH's third-largest holding at a weight of almost 6.2 percent.

“Bank of America Merrill Lynch analyst Vivek Arya lifted his price target for the shares of Nvidia from $185 to $210. Arya listed down multiple catalysts, including a surge in cloud capital expenditure, low investor interest and gaming momentum,” Benzinga reported last week. 

Compelling Catalysts

The long-term thesis for the semiconductor industry is shaping up nicely in the eyes of some market observers.

“Semiconductors in particular are a story worth a read, we believe. We view them as both the backbone and the future of the tech industry,” according to BlackRock. “The once highly cyclical group is benefiting from a more diverse demand base, reduced supply after years of consolidation, and new applications in a data-driven world.”

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