From healthcare and food production to consumerism and commerce, new advances in technology have made processes simpler, faster and cheaper. With much of the emerging world reaching middle class status and developed market consumers once again spending on new devices, the technology sector is poised to be a long-term winner in the global economy. Given the long term bullishness, it’s easy to see why many portfolios now include funds like the tech-heavy PowerShares QQQ (NASDAQ:QQQ) as growth elements.
 
However, as exciting as mobile commerce and cloud computing are, they still rely on one small, but extremely important element to function- semiconductors. For investors, the long term bullishness for technology is built on a solid foundation of chips.
 
SEE: Is Cloud Computing An Investable Trend?

A Bullish Outlook 
Finding their way into everything from heart rate monitors to Apple (NASDAQ:AAPL) iPads, semiconductors are the lifeblood of the technology industry. It stands to reason that as the overall technology sector grows, the need for faster and energy-efficient computer chips will grow as well. Despite the historical seasonality of the sector, the long-term outlook for the semis is good.
 
According to a new report by researcher RNCOS, global semiconductor demand is anticipated to expand at a compound annual growth rate (CAGR) of around 6% between 2012 and 2015. Driving that growth will be Asia-Pacific nations- especially India and China- as penetration of smartphones and tablets continues to grow. Likewise, continued growth in other comer technology applications will help stem the tide of falling global PC sales.
 
Already, global shipments of semiconductors appear to rebounding from the Great Recession’s lows. The Semiconductor Industry Association (SIA) latest monthly report shows that global sales for March 2013 were 0.9% higher than the March 2012 at a total of $23.48 billion, and total sales through the first quarter of 2013 were 0.9% higher than sales from the first quarter of 2012. This comes as inventory restocking has become necessary in the face of rising consumer and industrial application demand.
 
Yet, despite the recent sales gains and the bullish long term outlook, the Semis haven’t performed as well as their tech counterparts. Since the end of the Credit Crisis in 2009, the NASDAQ has clocked in gains every year and returned a respectful 10% last year and 4% in 2011. Yet, not every high-tech subsector has been so lucky. Semiconductor stocks- as measured by the Philadelphia Semiconductor Index- actually fell 7% in 2011 and dropped another 2% in 2012. While the group has risen since the start of this year, it still has catching up to do to reach to tech brethren.
 
SEE: The Industry Handbook: The Semiconductor Industry

Stacking Those Wafers 
Given the potential bullish tailwinds propelling the semiconductors over the longer term, investors may want to add the sector. At $280 million in assets, the Market Vectors Semiconductor ETF (ARCA:SMH) is the largest specific ETF in the sector. However, the slightly smaller iShares PHLX SOX Semiconductor Sector Fund (NASDAQ:SOXX) may be a better bet. The ETF tracks the previously mentioned Philadelphia Semiconductor Index and basically doubles the amount of holdings in the Market Vectors’ ETF. This includes industry stalwarts like Intel (NASDAQ:INTC) as well as more specialized firms like Linear Technology Corporation (NASDAQ:LLTC). SOXX charges 0.48% in expenses.
 
For investors looking for some income from their semiconductor investment, they may want to take a flight to Taiwan. The nation is tech investor’s paradise and is home to a variety of semiconductor firms. On one hand you have fabless semi firm Silicon Motion Technology (NASDAQ:SIMO). Company designs- not actually produces- a portfolio of multimedia data processing, storage and transfer solutions primarily for consumer electronics. On the other, you have foundry kingpin Taiwan Semiconductor Manufacturing (NYSE:TSM) TSMC serves as a third party manufacturer for other semiconductor firms designs. Since it was founded in 1987, the company has served more than 600 customers and manufactured more than 11,000 products for various applications. The two Taiwanese chip giants yield 5.3% and 2%, respectively.
 
SEE: A Primer On Investing In The Tech Industry

The Bottom Line 
As technology continues to become more integrated into our lives, the real winners won’t be the device manufacturers, but those companies providing the building equipment for the sector. By adding the semiconductor producers, investors have a chance to play the backbone of technology. The previous picks along with broad funds like the PowerShares Dynamic Semiconductors (ARCA:PSI) will power portfolios in the months ahead.

At the time of writing, Aaron Levitt did not own shares in any of the companies or funds mentioned in this article.

Related Articles
  1. Investing Basics

    A Primer On Investing In The Tech Industry

    The tech sector can provide fantastic returns for investors with a little know-how in the field.
  2. Investing Basics

    Is Cloud Computing An Investable Trend?

    Wall Street loves the next hot trend of cloud computing, but is it for real?
  3. Markets

    Investment Valuation Ratios

    Learn about per share data, price/book value ratio, price/cash flow ratio, price/earnings ratio, price/sales ratio, dividend yield and the enterprise multiple.
  4. Mutual Funds & ETFs

    ETF Analysis: Direxion Daily S&P Biotech Bull 3X

    Learn more about the Direxion Daily S&P Biotech Bull 3x exchange-traded fund, a new triple-leveraged ETF tracking biotechnology equities.
  5. Mutual Funds & ETFs

    ETF Analysis: First Trust Health Care AlphaDEX

    Learn more about the First Trust Health Care AlphaDEX exchange-traded fund, an indexed fund that uses an advanced stock selection methodology.
  6. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI Emerging Mkts

    Learn more about the PowerShares FTSE RAFI Emerging Markets ETF, a fundamentally weighted fund that tracks emerging market equities.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares Cali AMT-Free Muni Bond

    Learn more about the iShares California AMT-Free Municipal Bond exchange-traded fund, a popular tax-advantaged ETF that dominates its category.
  8. Fundamental Analysis

    10 Major Companies Tied to the Apple Supply Chain

    Apple has one of the best supply-chain models. Here are some of the top businesses involved, and the benefits and challenges for all.
  9. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Dividend

    Learn more about the SDPR S&P Emerging Markets Dividend Fund, a yield-focused exchange-traded fund tracking global emerging economies.
  10. Mutual Funds & ETFs

    ETF Analysis: First Trust Dow Jones Global Sel Div

    Find out about the First Trust Dow Jones Global Select Dividend Index Fund, and learn detailed information about characteristics and suitability of the fund.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  3. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. Can mutual funds invest in IPOs?

    Mutual funds can invest in initial public offerings (IPOS). However, most mutual funds have bylaws that prevent them from ... Read Full Answer >>
  2. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  3. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  6. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!