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Can semiconductor ETFs continue to make heady gains?

Semiconductor ETFs have made impressive gains over the last few weeks, with many of the industry’s stocks red-hot right now, and recently hitting year highs. Nvidia’s [NVDA] share price is on a tear, up 131.74% this year and sky-rocketing 45.14% in the last month alone, as at Friday 12 November’s close.

The Semiconductors theme, represented by the iShares PHLX Semiconductor ETF [SOXX], is top of our Opto performance screener over the last month, up 19.50%. With production set to expand, and global chip sales surging despite continued chip shortages, is the industry at large poised for further, sustained growth? And how long can semiconductor ETFs ride this bullish outlook?


iShares PHLX Semiconductor ETF growth over the last month



How are semiconductor ETFs performing?

The chip makers’ benchmark iShares Semiconductor ETF, which holds 30 US stocks weighted by market capitalisation, hit an all-time high at $529.09 on 9 November, before closing last week at $523.65, up 38.87% year-to-date and 19.50% across the last month alone. Its rise has been boosted by Nvidia’s impressive gains as the ETF’s top holding, with a 9.75% weighting.

Among the top five components, Qualcomm [QCOM], which has a 5.74% weighting, has leapt 31.91% over the past month (through Friday 12 November), and Broadcom [AVGO], with an 8.02% weighting, has gained 16.56% in the same period.

Other sector ETFs have been flying high as well – the VanEck Semiconductor ETF [SMH] also hit a record peak on 9 November, at $305.95, and has jumped 19.12% over the month, with a 37.58% year-to-date through last Friday’s close. Incredibly, over half of the ETF’s 25 component stocks hit 52-week highs on either Friday 5 or Monday 8 November, according to CNBC. The S&P 500 index, by comparison, has risen 8.03% across the last month.

And if we look back over the previous five years, SMH’s share price rise of 328.12% (as at last week’s close) easily beats the S&P 500’s 114.62% gain.


Why are semiconductor ETFs surging?

Semiconductor ETFs have been setting new records on the back of a rise in global microchip sales in September, and across the third quarter of 2021. According to the semiconductor industry association (SIA), worldwide semiconductors sales hit $144.8bn Q3, a 27.6% year-on-year rise and up 7.4% from Q2. In September, global sales rose 2.2% from August to $48.3bn. The sales uptrend is expected to last for at least the next few months thanks to the ongoing global shortage, and could even continue into 2023, report Zacks.


Year-on-year rise of worldwide semiconductor sales


As well as shortages in microchips and related equipment, there are labour shortages and supply chain issues, while demand continues to grow – chip shipments hit record highs as the industry continued to ramp up production on growing demand across industries like autos, computers and electronic goods, report Zacks.

Major semiconductor stocks have also been boosted by other factors: Nvidia’s new AI tools puts the company at the forefront of the “gold rush” into the metaverse, according to MarketWatch, while Advanced Micro Devices [AMD] has won a major contract with Meta Platforms [FB] (Facebook) to use its Epyc processors. Alongside Nvidia’s electric share price gains, AMD – one of the top components in the SOXX and SMH semiconductor ETFs – notched its best day in 15 months on the news, leaping 9.05% on 8 November, helping the California-based company to a 40.79% monthly gain at 12 November’s close.


What’s next for semiconductor stocks and ETFs?

Semiconductor stocks and ETFs are primed to increase sales and earnings even more quickly over the next two years, based on consensus estimates among analysts polled by FactSet, reports MarketWatch.

This view gets support from Craig Johnson, chief market technician at Piper Sandler, who told CNBC that the VanEck Semiconductor ETF [SMH] looks to be at the midpoint of a “long-term upward trending channel,” suggesting there’s further upside potential. Johnson added that SMH stock is “just starting to break out of a nice multi-month consolidation, looks like it’s at a pretty good entry point, and it’s one I think should be bought for those that are looking to add more semiconductor exposure to their holdings.”

“[The SMH stock is] just starting to break out of a nice multi-month consolidation, looks like it’s at a pretty good entry point, and it’s one I think should be bought for those that are looking to add more semiconductor exposure to their holdings” - Piper Sandler Chief Market Technician Craig Johnson


Tocqueville Asset Management portfolio manager, John Petrides, also sees the huge potential for further growth across the semiconductor space, telling CNBC, “when you look at the bottom-up fundamentals, the themes for the chips are really quite strong … 5G, artificial intelligence, augmented reality, the metaverse, electric vehicles, cryptocurrency – there’s so much end-market demand that’s where a lot of capital is flowing, to where these guys sit, right in the catbird seat.”

The semiconductor sector has been flying high, and looks well set to continue to benefit from the current market conditions and development in disruptive technologies over the short and medium terms at least.

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