Chewing On Chips: Looking For Semiconductor ETFs To Rebound In 2016

Intel Corporation INTC is down 4.2 percent this year. Qualcomm, Inc. QCOM has plunged 34.7 percent, while the PHLX SOX Semiconductor Sector Index is lower by 1.7 percent. Those statistics imply this has been a rough year for semiconductor stocks, but that does not mean 2016 will be a sequel.

A spate of mergers and acquisitions news this year has stemmed losses for semiconductor stocks and some recent data points suggest short sellers that previously sank their teeth into chip stocks have been returning those borrowed shares.

Add to that, not all semiconductor ETFs have been duds this year. By comparison to some of its rivals, the PowerShares Dynamic Semiconductors Portfolio PSI has impressed with a year-to-date gain of nearly 2.7 percent.

"Looking ahead, I believe the computer and electronics industry is likely to see relatively robust growth –especially when you consider how flat order activity has been since March 2015. As of October, computer and electronic equipment orders were up 7.8% from the previous year. But even if orders are completely unchanged in the next four months, they will still be up 8.0% on a year-over-year basis by February 2016. These 'easy comparisons' (growth coming off of a flat base) could attract the attention of investors looking for compelling growth stories. And, as the chart below shows, even with increased demand, order levels are still well below those seen during the mid-2000s," said PowerShares in a new note.

Related Link: 4 Semiconductor Stocks Disappointing Goldman Sachs

While PSI does hold shares of Intel and other chip giants, such as Texas Instruments Inc. TXN, the ETF devotes just a quarter of its weight to large-cap stocks, which has proven to be an advantage at a time when large-cap semiconductor manufacturers have been among the sector's worst offenders.

The $66.6 million PSI, which holds 30 stocks, is a smart or strategic beta ETF because its underlying index "is designed to provide capital appreciation by thoroughly evaluating companies based on a variety of investment merit criteria, including: price momentum, earnings momentum, quality, management action, and value," according to PowerShares. 

There is something to that methodology because PSI's index has outpaced the S&P Semiconductor Index by 60 basis points since inception. With some investors having left semiconductor stocks for dead and earnings estimates perking up, PSI could improve on its 2015 showing next year.

"Earnings estimates for the semiconductor sector are showing budding improvement, which has boosted earnings estimates for semiconductor stocks. Forecasted 2016 earnings per share (EPS) estimates for the large-cap S&P 500 Semiconductors & Semiconductor Equipment Industry Group Total Return Index have increased from a low of $36.03 in the week ending Aug. 28 to a recent value of $37.11. Similar trends can be seen in the mid-cap equivalent group. EPS for the S&P 500 Semiconductors & Semiconductor Equipment Industry Group Total Return Index is projected to increase a healthy 11.6% on a year-over-year basis. That is a faster rate of growth than the overall S&P 500 Index, which is forecast to see EPS growth of 8.9%," adds PowerShares.