Semiconductor ETF Reclaiming Leadership in Technology


Chip stocks began April with a bang, potentially ending a year of underperformance against other parts of the technology sector.

The Market Vectors Semiconductor ETF (SMH) is up about 7 percent in the last week, making it the best-performing major fund in the entire market. Its sharp gains so far in April also put it on pace for its best month in over a decade.

The rally comes as no surprise to readers of Market Insights. Our blog stressed the warm reception investors gave companies like Xilinx (XLNX), Lam Research (LRCX) and Skyworks Solutions (SWKS) last earnings season. We also highlighted a growing perception among executives since February that demand was rebounding.

Guess what else suddenly jumps off the TradeStation platform? Chips are reclaiming leadership from software companies within the technology sector– a huge reversal from 2018.

Percentage change chart of select technology ETFs since December 26. Notice SMH's recent outperformance.
Percentage change chart of select technology ETFs since December 26. Notice SMH’s recent outperformance.

Data Centers, 5G Replace Smart Phones

Falling demand for smart phones like the Apple (AAPL) iPhone was a big reason for last year’s weakness in chips. While that market remains saturated for now, investors are starting to see new growth opportunities from data centers and the spread of 5G wireless networks.

Here are the five largest holdings in the Market Vectors fund:

  • Intel (INTC): The world’s second-biggest chip maker after Samsung is also the only semiconductor stock in the Dow Jones Industrial Average ($INDU). It’s struggled in recent years with production difficulties and troubles keeping up in the data-center market.
  • Taiwan Semiconductor (TSM): The South Korean company manufactures circuits for other companies.
  • Nvidia (NVDA): One of the S&P 500’s top performers between 2016 and 2018, NVDA lost more than half its value since last October. Management is striving to shift from computer graphics chips to data centers.
  • Texas Instruments (TXN): The oldest player in the industry traces its history back to 1931. It focuses more on industrial markets and tends to be less volatile than other big names.
  • Broadcom (AVGO): Formed from the merger of Broadcom and Avago, AVGO is the only company listed here that’s already broken out to new highs. Its data-center business is fueling the move.

Don’t Forget Bitcoin

Aside from these factors, clients may want to recall another potential catalyst: Cryptocurrencies. This week saw the biggest gain for Bitcoin futures (@BTC) in about a year. If sentiment toward blockchain assets keep improving, people may start talking about “bitcoin mining.” That was a big driver early last year that’s mostly been forgotten since.

In conclusion, sentiment and price action have grown progressively more positive toward SMH and its constituents. Hopefully this article helps you know some of the big forces at work and key names to watch.

This post is part of our regular “ETF of the week” series. It focuses on exchange-traded funds with interesting news or price changes.

Semiconductor ETF, weekly chart, with relative strength against software makers at bottom.
Semiconductor ETF, weekly chart, with relative strength against software makers at bottom.

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David Russell is Global Head of Market Strategy at TradeStation. Drawing on nearly two decades of experience as a financial journalist and analyst, his background includes equities, emerging markets, fixed-income and derivatives. He previously worked at Bloomberg News, CNBC and E*TRADE Financial. Russell systematically reviews countless global financial headlines and indicators in search of broad tradable trends that present opportunities repeatedly over time. Customers can expect him to keep them appraised of sector leadership, relative strength and the big stories – especially those overlooked by other commentators. He’s also a big fan of generating leverage with options to limit capital at risk.