It can be difficult deciding which ETFs to buy as both semiconductor stocks and exchange-traded funds have been rallying throughout the year, fueled by the bright prospects of the industry.
The rapid adoption of cutting-edge technologies like 5G, artificial intelligence (AI), cloud computing, the Internet of Things (IoT), gaming, autonomous cars and cryptocurrencies are expected to fuel rapid growth in the industry.
“Stay-at-home, work-from-home,” as well as online learning trends, have further contributed to the rising demand for chips. This ultimately has led to a severe shortage worldwide. As a result, many chip stocks have seen record highs in recent months. So far in the year, the widely followed PHLX Semiconductor Sector Index is up 19.5%.
With news suggesting that the semiconductor shortage is getting worse, investors are debating which chip stocks could benefit from this development. But chip ETFs offer an opportunity to invest in the industry by providing exposure to a basket of global semiconductor companies.
The exposure to numerous firms could also serve as a safety net against volatility, So let’s look at these three ETFs to buy in October to play the semiconductor shortage.
The Chip Industry Is Growing
As we continue to witness growing digitization in industries like transport, healthcare, financial systems, agriculture and retail, analysts expect chip demand to keep increasing in the foreseeable future.
According to metrics from the International Data Corporation, global semiconductor industry sales are expected to surge 17.3% in 2021, up from 10.8% in 2020.
Meanwhile, the semiconductor industry is forecast to reach $600 billion by 2025, implying a 5.3% compounded annual growth rate (CAGR). The report also suggests memory sets will see the most significant revenue growth at around 37%, followed by 29% in analog and 26% in logic segments.
As it takes years to develop foundries, the advisory firm Forrester forecasts the chip shortage to last through the next year and into 2023.
Furthermore, Boston Consulting Group suggests the industry will need to invest around $3 trillion in research and development (R&D) and capital expenditure globally over the next ten years across the value chain to meet the increasing demand for semiconductors.
With that information, here is our list of ETFs to buy for long-term investors to make the most of the booming semiconductor space:
- Invesco Dynamic Semiconductors ETF (NYSEARCA:PSI)
- iShares Semiconductors ETF (NASDAQ:SOXX)
- SPDR S&P Semiconductors ETF (NYSEARCA:XSD)
Readers should note that a busy earnings season is here. Therefore, there could be choppiness as well as short-term weakness in many of the names in these funds. However, a potential decline in price would mean a better entry point for buy-and-hold investors.
ETFs to Buy: Invesco Dynamic Semiconductors ETF (PSI)
52-week range: $77.72– $136.75
Dividend yield: 0.15%
Expense ratio: 0.56% per year
Our first fund, the Invesco Dynamic Semiconductors ETF, currently invests in 32 chip stocks. Among the investment merit criteria fund managers use are earnings and price momentum, quality, value as well as management actions.
PSI, which tracks the Dynamic Semiconductor Intellidex Index, started trading in June 2005. The top 10 names account for over 45% of net assets $704.9 million.
Among the leading names are Broadcom (NASDAQ:AVGO), Analog Devices (NASDAQ:ADI), Texas Instruments (NASDAQ:TXN), KLA-Tencor (NASDAQ:KLAC), and Nvidia (NASDAQ:NVDA).
The fund currently trades at slightly above $127 and gained 21.9% year-to-date (YTD) and 54.1% over the past year. Price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 35.83 and 6.41, respectively. Interested readers could regard the $122.5 level as a better entry point.
ETFs to Buy: iShares Semiconductors ETF (SOXX)
52-week range: $301.44– $478.19
Dividend yield: 0.69%
Expense ratio: 0.43% per year
The iShares Semiconductors ETF gives access to 30 U.S.-listed chip names. The fund, which tracks the ICE Semiconductor Index, was first listed in July 2001.
The top 10 names in the fund account for over 55% of net assets of $7.46 billion. In other words, it is a top-heavy fund. Among the leading names in the roster are Broadcom, Intel (NASDAQ:INTC), Nvidia, Texas Instruments, Qualcomm (NASDAQ:QCOM), and Marvell Technology (NASDAQ:MRVL).
SOXX trades at slightly above $462. Its price has added 22.5% YTD and 141% over the past 12 months. P/E and P/B ratios stand at 32.73 and 6.87, respectively. A potential decline of 3%-5% in the short term would improve the margin of safety.
ETFs to Buy: SPDR S&P Semiconductors ETF (XSD)
52-week range: $129.54– $209.53
Dividend yield: 0.12%
Expense ratio: 0.35% per year
Our final fund, the SPDR S&P Semiconductor ETF, is an equal-weighted fund that invests 40 semiconductor names with a wide range of market capitalizations (caps). Therefore, the focus shifts away from the large well-known names toward smaller ones with high-growth potential.
XSD, which aims to match the performance of the S&P Semiconductor Select Industry Index, began trading in February 2006. The top ten stocks comprise close to 30% of net assets of $1.12 billion.
Energy services provider SunPower (NASDAQ:SPWR), advanced imaging solutions provider Ambarella (NASDAQ:AMBA), specialty memory and storage group Smart Global Holdings (NASDAQ:SGH), programmable devices developer Xilinx (NASDAQ:XLNX), and low power programmable leader Lattice Semiconductor (NASDAQ:LSSC) lead the stocks in the roster.
XSD hovers around $206 territory and gained 19.5% YTD and 48.5% over the past year. Trailing P/E and P/B ratios stand at 22.81 and 5.63, respectively. Interested readers could regard a drop below $200 as a better entry point.
On the date of publication, Tezcan Gecgil did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Tezcan Gecgil, Ph.D., has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all three levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation.
