Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the semiconductor industry to thrive as our society's electronics needs drive demand, the Market Vectors Semiconductor ETF (NYS: SMH) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The semiconductor ETF's expense ratio -- its annual fee -- is a relatively low 0.35%. The fund is smallish, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has performed reasonably well, beating the world market index so far this year, but it's also very young, born just this past December. As with most investments, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
What's in it?
Several semiconductor companies had strong performances over the past year, but many have languished, waiting for the economic recovery to gain steam. Semiconductors are, after all, a very cyclical business.
Skyworks Solutions (NAS: SWKS) gained 15% over the past year, partly riding the Apple wave as it supplies numerous components for iPads and iPhones. It specializes in power amplifier modules, or PAMs, among other things, and its revenue and earnings have been growing at rapid and accelerating rates. It has been gaining share in Samsung phones, as well.
Among the companies that didn't do as well last year, Atmel (NAS: ATML) sank some 48%, partly on lowered guidance for the coming quarter due to slower-than-expected sales of Google Android tablets. It's a maker of touchscreen controllers, and has fallen so far that at this point, some find it a bargain on valuation merit alone. There are other reasons to be optimistic as well, such as the upcoming new Windows release.
NVIDIA (NAS: NVDA) , maker of fast graphics cards, slumped 29% as some question whether its exciting new cloud technology will eat away at its main bread and butter. It may be the right strategy, though, and in the meantime, NVIDIA should benefit from expected growth of roughly 36% for global smartphones over the coming years.
Applied Materials (NAS: AMAT) , maker of semiconductor fabrication equipment, shed 12%, but it seems to be building steam with revenue and earnings up recently. It also pays a sizable 3.4% dividend and is benefiting from demand in Korea and the failures of several major memory companies. As demand for smartphones and tablets grows, Applied Materials should receive plenty of orders.
The big picture
Demand for semiconductors isn't going away anytime soon. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
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