After toughing out "the worst recession the semiconductor industry has seen since its inception", things are going the way of the semi manufacturers. Strengthening consumer confidence, a growing global economy and reported increase in corporate spending have helped push the sector into positive earnings and that continued profit could have the same effect on portfolios.
IN PICTURES: Retire A Millionaire In 10 Steps

Positive Circuits
Semiconductor sales fell more than 9% throughout 2009, but analysts are now predicting a wave of nearly 20% growth in sales for the sector in 2010. Consumers are parting with their hard-earned dollars in the tech sector. Research firm IDC, reports that shipments of personal computers have risen by 24% in the past quarter. The rise in e-book readers popularity, such as Amazon's (NASDAQ: AMZN) Kindle, are also having positive effects. Global e-book reader shipments are predicted to increase from 700,000 units in 2008 to more than 28 million units by 2013. Also the push for consumers to be more "green" could help the semi industry profit. As consumers buy more energy efficient appliances, the more complex the chip sets need to be in performing their functions.

The average age of a computer in corporate America is nearly five years old. While companies reduced IT spending during the downturn, these older machines are at the point where it becomes more costly to keep them running rather than buy new. Tech companies are typically one of the first recipients of increased corporate spending as their products or services help increase efficiency and growth. Analysts predict that CAPEX spending will rise by over 14% in the coming year.

The contract prices of 12-inch wafers grew 10% in the fourth quarter of 2009, 5% in the first of 2010 and the Semiconductor Industry Association announced that February sales increased 56% year-over-year. Both Texas Instruments (NYSE: TXN) and LSI (NYSE:LSI) raised their guidance, and tech bell-weather Intel (NASDAQ: INTC) reported soaring earnings, topping estimates by 13.2%.

A Chipper Portfolio
The semiconductor industry is one of a cyclical nature. While Intel's blowout earnings have caused the overall sector to spike over the past few days, it's not too late to ride the next wave in the sector. A growing global economy and increased tech spending should keep the upsurge going. Exchange-traded funds (ETFs) can provide an easy way to own a basket of various semi manufacturers with the ease of holding a single ticker.

The iShares S&P North American Tech-Semiconductors (NYSE: IGW) is the second largest ETF in the sector based on assets, and holds 52 stocks. This includes an 8.5% weighting towards Intel. The equal-weighted SPDR S&P Semiconductor (NYSE: XSD) might be a better choice for investors with its lower expense ratio and more concentrated 27 stock portfolio. The SPDR's portfolio has outperformed IGW over the last year ending in March, by nearly 16%. The SPDR charges 0.35% in expenses.

The most heavily traded choice in the sector is the Semiconductor HOLDRs (NYSE: SMH). The Holding Company Depositary Receipts is made up of a basket of stocks that never get rebalanced or reconstituted. The current mix contains 18 stocks, including Analog Devices (NYSE:ADI) and Applied Materials (NASDAQ: AMAT). The HOLDRs' interesting structure could be a boon or bust depending on the sector it tracks - just ask investors in the B2B Internet HOLDRs (NYSE: BHH). SMH trades in units of 100 and can be unbundled into the individual stocks. Investors get to keep the voting and dividend rights of the underlying stocks.

Bottom Line
Things are looking quite chipper in the semiconductor sector going forward. The semis are poised to capitalize on the growing global trends and increases in corporate and personal spending. Recent knockout earnings from a few of the leaders in the sector have helped point the way for the next bull market cycle in the sector. Adding a dose of chips to a portfolio via ETFs will help investors cash in on this growth. (For related reading, take a look at Technology Sector Funds.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  2. Chart Advisor

    Now Could Be The Time To Buy IPOs

    There has been lots of hype around the IPO market lately. We'll take a look at whether now is the time to buy.
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  5. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  6. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  7. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  8. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  9. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  10. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center