Tickers in this Article: XLK, AMZN, INTC, VSEA, AMAT, SOXX, XSD, ENTR, SOLR, MCHP
From healthcare and food production, to consumerism and commerce, new advances in technology has made processes simpler, faster and cheaper. With the emerging world reaching middle class status and consumer confidence returning to the developed, the technology sector is poised to be a long-term winner in the global economy. Funds like the Technology Select Sector SPDR (NYSE:XLK) are a great way to add a wide swath of technology companies to a portfolio. However, a better play on technology may lie within those companies providing the "picks and shovels".

TUTORIAL: Managing Risk And Diversification

Cash In Chips
Finding their way into everything from heart rate monitors to 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. Global chip sales grew nearly 9% in the first quarter of 2011, to about $75.8 billion. Analysts estimate that PC sales will grow 10.5% throughout the year and growing global consumer and business appetite for electronics should help buoy long-term demand.

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. The Tablet PC market is also contributing to long-term growth in semis. Over the next five years, Tablet computers shipments are expected to increase at a compound annual growth rate of 56%, with shipments rising from 16.1 million units in 2010 to 147.2 million units in 2015. (For related reading, see Compound Annual Growth Rate: What You Should Know.)

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. Recently, tech bellwether Intel (Nasdaq:INTC) unveiled new 3-D, or "tri-gate," transistors for its chips. Minuscule skyscrapers that jut from the surface of the typically flat transistors improve performance without adding size. These chips will improve power efficiencies and processing speeds.

Finally, a new wave of M&A could be a bullish sign for chip producers. Applied Materials (Nasdaq:AMAT) recently made a $4.9 billion offer for Varian Semiconductor Equipment (Nasdaq:VSEA). All three of this year's significant chip acquisitions rank among the 10 largest deals in the industry. Analysts at Barclays believe that these announcements will be an inflection point and that chip shares will go higher.

Adding Those Wafers
The semiconductor industry is one of a cyclical nature. However, the long-term trend for the sector is one of increasing demand. The all-encompassing iShares PHLX SOX Semiconductor Sector (Nasdaq:SOXX) is about 7% down from its recent highs and provides investors an opportunity to add the sector to a portfolio. The SPDR S&P Semiconductor (NYSE:XSD) can be used as a proxy as well. For those looking for individual semi plays, here are some picks.

Producing the chips that allow people to connect their DVD, TV and computers to one network, Entropic Communications (Nasdaq:ENTR) holds nearly 80% of the market share for such semis. The company has doubled sales over the last year, yet only trades at a P/E of 10 with an $800 million market cap. The company could make a great take-over candidate.

Solar energy is quickly growing in popularity around the world and GT Solar (Nasdaq:SOLR) could be great arms merchant play. The company doesn't make solar panels, but rather the equipment needed to make solar panels. The company is seeing huge order backlogs and is trading at a cheap ten times earnings.

Microchip Technology's (Nasdaq:MCHP) semiconductors find their way into washing machines, garage door remotes, diabetics' glucose meters and various other consumer products. But boring isn't bad; the company is virtually debt free and generates more than ample free cash flow to grow its dividend. Shares of Microchip Tech yield 3.4%. (To learn more, see Dividend Facts You May Not Know.)

The Bottom Line
As technology continues to become more integrated into our lives, the real winners will be the 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 ETFs and stocks are just some examples of the bright future the sector has.

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