Can the SPDR S&P Semiconductor ETF continue its steady climb?

The SPDR S&P Semiconductor ETF [XSD] has climbed just under 75% from $118.02 at the close on 8 September 2020 to $206.50 at the close on 3 September this year.

Surging appetite for semiconductors in a range of applications from electric vehicles to video games after people became more environment conscious and were forced to stay at home during lockdowns has lifted performance for the sector and the ETF.

The XSD did reverse to $158.58 at the close on 12 May as on concerns over higher interest rates for highly leveraged technology stocks. There were also worries about what impact supply shortages of semiconductors would have on the industry.

Tensions mount

The squeeze has been caused by a range of factors — from the rise in semiconductor hungry 5G technology and home electronics to trade and political tensions between the US and major chip maker China. The rising cost of global shipping due to the pandemic has blasted many industries including semiconductors, such as consumer technology and carmakers, some of whom have been forced to delay production. 

Yet, global sales of semiconductors were $44.5bn in June 2021, up 29.2% from June 2020 according to the Semiconductor Industry Association (SIA). Sales in the second quarter were $133.6bn, also up 29.2%.

That demand, coupled with reports that chipmakers had responded to the shortage by ramping up their prices between 10% - 30% largely calmed investors’ fears. The XSD is now sitting at $205.49 at the close on 2 September.

Launched on 31 January 2006, as of 3 September the XSD has a year-to-date daily total return of 14.65% and total assets of $990.28m, according to Yahoo Finance.

The fund seeks to provide exposure to the semiconductors segment of the S&P TMI, which comprises the semiconductors affiliate industry.

Its top holding is SiTime Corporation [SITM] which has a 4.47% weighting, followed by Monolithic Power Systems [MPWR] with 3.38%, Advanced Micro Devices [AMD] with 3.20% and Power Integrations [POWI] with 3.17%. Other holdings include Nvidia [NVDA] with 2.97%.

Shares in SiTime Corporation have ticked up from $63.98 at the close on 11 September last year to $224.62 at the close on 3 September this year.

The chipmaker builds silicon-based timing devices — smaller than a pinhead — for use in a range of products from digital payments technology to smartphones and aeroplane cockpits. The switch in demand from legacy quartz timing devices and the growth of digital technology during the pandemic has particularly supported sales and SiTime stock price. In the second quarter its revenue leapt 107.2%.

The company is a spin-off from Japanese semiconductor firm MegaChips, which still owns around 30% according to Investor’s Business Daily. 

“Precision timing, which is what we do, is very key in networking, telecommunications, 5G, automated driving, satellites, watches and Internet of Things,” chief executive Rajesh Vashist told Investor’s Business Daily. “We're trying to disrupt a 70-year-old market.”

Shares in semiconductor firm Monolithic Power Systems have surged from $237.03 at the close on 11 September last year to $502.13 at the close on 3 September. It recently posted second quarter revenues up 57.5% to $293.3m, helped by soaring demand for its lighting control, computing and storage and automotive products.

Nvidia’s share price has risen from $119.13 at the close on 8 September last year to $228.43 at the close on 3 September, lifted by surging demand for video games and its graphics processing units.

Bullish expectations

The SIA remains confident in the sector’s long-term prospects giving the continued growth in digital technology. The semiconductor shortage is unlikely to hit overall sector 2021 sales with the SIA reporting that they are set to grow 19.7% worldwide to $527.2bn. 

“Semiconductors are becoming increasingly integral to the game-changing technologies of today and the future,” said the SIA’s president John Neuffer in June of this year. 

However, growth is tipped to slow to 8.8% in 2022 as the pandemic consumer electronic boom wears off. Looming fears of trade disputes and associated tariff increases and restrictions could also weigh the segment. 

Zacks analyst Sanghamitra Saha is still optimistic: “Within the broader tech space, semiconductor, the value-centric traditional tech area, is in a sweet spot now. Higher demand from emerging technology applications like tablets and smartphones despite still-subdued PC shipments are tailwinds to the space.”

Consolidation remains a trigger for shares in the sector for example, Nvidia’s planned acquisition of chip designer Arm Holdings and AMD spending $35bn to buy Xilinx [XLNX]. That brings its own risks, but it can also mean a higher valued and powerful sector to invest in. It could be time to add on some chips.