Semiconductor Stocks Have Great Growth Potential

Semiconductor Stocks Have Great Growth Potential

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some semiconductor-related stocks to your portfolio but don't have the time or expertise to hand-pick a few, the iShares PHLX Semiconductor ETF 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.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. The iShares ETF's expense ratio -- its annual fee -- is a relatively low 0.48%.

This ETF has performed reasonably, beating the world market over the past three and five years, but lagging it over the past 10. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why semiconductors?
Our growing world population will demand more and better high-tech products and services over time, boosting the business of successful technology-oriented companies. And these days, much of the technology we use is built on semiconductors.

More than a handful of semiconductor-related companies had strong performances over the past year. Micron Technology , for example, more than doubled. Still, its forward P/E is near 9, suggesting it has more room to grow as it successfully adapts to a changing market. Micron's purchase of Japanese manufacturer Elpida has boosted its capacity, its pricing power, and its relationship with Apple. It also generates cash that can be used for share buybacks or to reinstate its dividend of yore. There are still concerns, though, such as competition and Micron's debt. Micron beat expectations for both revenue and earnings in its last quarter, and is downsizing its workforce by about 5%. Investors should keep the industry's cyclicality in mind.

Other companies didn't do quite as well over the last year, but could see their fortunes change in the coming years. Israel-based Mellanox , for example, shed 66%, "voluntarily" delisting itself from the Tel Aviv Stock Exchange. That will at least save it some money, and analysts at Stifel suggest that the company might rebound from here. Its last few years were quite strong, as it invested heavily in cloud computing. Its second quarter featured estimate-topping earnings and revenue, but at current levels its stock doesn't seem bargain-priced. Mellanox recently bought Kotura, a high-speed networking technology company.

Audio chip maker Cirrus Logic is down 46%, having tumbled after reporting disappointing quarterly results and guidance. Bears worry about its reliance on Apple, which accounted for some 82% of revenue in its last fiscal year, though Cirrus has been lining up other customers. They also fear that lower-priced iPhones could hurt Cirrus and think its growth is due to slow. On the other hand, the stock got a boost recently on news that another chipmaker, Avago, expected strong upcoming sales, presumably via Apple.

Advanced Micro Devices lost 12%, and has been in penny-stock territory all year. The stock hasn't been kind to many investors, averaging an annual loss of about 5% over the past 30 years. Bears see it threatened by a weak PC market and don't like its heavy free-cash-flow losses in recent years. Still, bulls are hopeful about its recent cost-cutting, and about its growing focus on gaming technology. Management expects profitability soon, and a turnaround may be under way.

The big picture
Demand for technology 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.

This isn't the only interesting ETF out there. You can learn more about a few ETFs that have great promise for delivering profits to shareholders by checking out The Motley Fool's special free report "3 ETFs Set to Soar." Just click here to access it now.

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Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Apple. The Motley Fool recommends Apple and owns shares of Apple and Cirrus Logic. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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