Place Your Chips On The Chip Makers

By Aaron Levitt | May 10, 2013 AAA

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.

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