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Chipmakers Get Lift From Rising Demand

NEW YORK (TheStreet) -- Increased demand for personal computers and electronics and increased demand from the industrial and information technology sectors has bolstered sales of global chips, making the near-term future of the U.S. semiconductor industry bullish.

Most recently, the Semiconductor Industry Association reported that global chip sales in May rose 4.5% from the prior month and nearly 48% from a year earlier. This upward trend, increase in revenue and an expected solid demand for the remainder of the year has enabled the SIA to nearly triple its 2010 sales forecast.

Another reason that semiconductors are attractive is because they are seeing growth both domestically and internationally. In the U.S., the sector witnessed growth of 8.2% in April and 52% from a year earlier. Asia, which accounts for more than half of all global chip sales, saw sales rise 5% in April and 51% from a year earlier.

Lastly, the semiconductor industry's sales growth is being buoyed by more than just one force. Revenue in the memory sector arm of semiconductors is expected to grow by 52% year over year as demand for personal computers, netbooks, media tablets and smartphones continues to remain strong. Additionally, revenue growth from the industrial, military and aerospace, and automotive industry segments are expected to achieve year-over-year growth of more than 20% this year. The third revenue stream that is expected to give semiconductors positive sales support comes from healthy growth in enterprise spending which will help achieve a compound annual growth rate of 12.2% over the next four years.

In a nutshell, increased demand by global consumers and companies who pushed back equipment replacement during the recession will likely give semiconductors positive price support in the near-term future. Some ways to play the sector include:

  • Semiconductors HOLDRs (SMH), which holds 18 different semiconductor companies with Intel (INTC), Texas Instruments (TXI) and Applied Materials (AMAT) as its top holdings. SMH closed at $25.78 on Tuesday.
  • iShares S&P North Amer Tech-Semicondctrs (IGW), which holds 52 different semiconductor companies and includes Analog Devices (ADI) and Altera (ALTR) in its top holdings. IGW closed at $43.28 on Tuesday.
  • PowerShares Dynamic Semiconductors (PSI), which holds 30 different semiconductors companies and includes Broadcom (BRCM) and Micron Technology (MU) in its top holdings. PSI closed at $11.97 on Tuesday.

Although an opportunity seems to exist in the semiconductor industry, it is equally important to keep in mind factors that could hinder the performance of the sector such as macroeconomic problems like sovereign debt, continued elevated unemployment levels in the U.S. and weak consumer sentiment. To help protect against these forces, the use of an exit strategy which identifies price points at which downward price pressure could be eminent is important.

According to the latest data at SmartStops.net, these price points are: SMH at $24.90, IGW at $41.92 and PSI at $11.71.

Written by Kevin Grewal in Houston.

Grewal has no positions in the securities mentioned.

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Kevin Grewal serves as the editorial director and research analyst at The ETF Institute, which is the only independent organization providing financial professionals with certification, education, and training pertaining to exchange-traded funds (ETFs). Additionally, he serves as the editorial director at SmartStops.net where he focuses on mitigating risks and implementing exit strategies to preserve equity. Prior to this, Grewal was an analyst at a small hedge fund where he constructed portfolios dealing with stock lending, exchange-traded funds, arbitrage mechanisms and alternative investments. He is an expert at dealing with ETFs and holds a bachelor's degree from the University of California along with a MBA from the California State University, Fullerton.

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