Chip Off the Old Block: Semiconductor Funds Humming After Banner Third Quarter

Semiconductor ETFs are up this week, after a glowing third-quarter sales number that shows chip technology is in demand in a wide variety of global markets -- especially so in the U.S. and China.

Here's the skinny. According to the Semiconductor Industry Association, third-quarter global semiconductor sales skyrocketed 11.5% from the second quarter -- a boost the SIA cites as "the highest quarterly sales total in history."

"The global semiconductor market has rebounded markedly in recent months, with September showing the clearest evidence yet of resurgent sales," offers John Neuffer, president and CEO of the Semiconductor Industry Association. "The industry posted its highest-ever quarterly sales total, with most regional markets and semiconductor product categories contributing to the gains. Indications are positive for increased sales in the coming months, but it remains to be seen whether the global market will surpass annual sales from last year."

Overall, worldwide semiconductor sales stood at $88.3 billion in the third quarter, with a particularly strong month of September, where sales were up 4.2% over August figures. Regionally, China saw the highest jump in semiconductor sales, at 5.4% for the quarter, and rose by 12.0% on a year-to-year basis. North American markets may be growing faster, though, as sales on the continent grew 4.2% in Q3, but actually were down 2.4% since the third quarter of 2015. That suggests a real burst of growth in the last half of 2016, the SIA reports, even though China has shown the most demand over the long haul.

"China stood out in September, leading all regional markets with growth of 5% month-to-month and 12% year-to-year," Neuffer adds. "Standouts among semiconductor product categories included NAND flash and microprocessors, both of which posted solid month-to-month growth in September."

As a result, semiconductor ETFs are booming right now. For instance, the benchmark iShares PHLX Semiconductor ETF (SOXX) is up significantly over the past two quarters, from $90 per share in May to $110 per share on Nov. 2. On a year-to-date basis, the ETF shines at a 27% positive growth clip.

The VanEck Vectors Semiconductor ETF (SMH) fares even better on a year-to-date basis. The fund, which provides exposure to 26 global securities by tracking the MVIS US Listed Semiconductor 25 Index, is up $30 so far in 2016, to $68 per share on Nov. 2.

Wall Street insider say the semiconductor is in a great spot right now -- not too hot and not cold -- and that's a perfect climate for continued sector growth.

"The semiconductor industry is almost in Goldilocks territory -- with modest growth in multiple segments like cloud computing and autos, but not really bubbling up anywhere," says Barry Randall, a technology portfolio manager for Covestor in Saint Paul, Minn.

Randall calls the semiconductor market as "a little odd" at the end of 2016, considering the famously cyclical nature of the semiconductor industry. "This kind of middle ground is confirmed with industry-wide average selling prices weaker than they ought to seasonally be, made up for by slightly higher-than-expected volumes," he says.

He also cites increased merger activity as a major reason for industry performance, at least in the financial markets.

"Overall, semiconductor industry revenues are basically flat year-over-year so far in 2016," Randall notes. "Semiconductor stocks have done well because of merger and acquisition activity. Although deal making may not reach the heights of 2015, so far in 2016, pending and consummated deals like Qualcomm/NXP, Softbank/ARM Holdings and Analog Devices / Linear Technology are keeping the valuations of all semi stocks at elevated levels." As that M&A activity peters out, Randall expects stock prices to pull back later in 2017.

Industry analysts agree on the M&A outlook. "The Qualcomm Inc.-NXP Semiconductors NV, valued at about $38 billion, would make the biggest ever semiconductor deal and tag Qualcomm as one of the foremost providers to the rapidly expanding automotive chips market," says Zacks Research, in an investment note this week. The financial analysis firm adds the semiconductor space "is in a great shape lately on decent earnings, consolidation activities and emerging technologies that took an upper hand over the still-subdued PC shipments."

For technology investors, semiconductors have been a great place to be so far in 2016. What's more, it looks like the party may continue into 2017.

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