Here's Why Semiconductor ETFs Are Rallying

The tech sector has been seen some steep ups and downs in September as profit-booking took centerstage last month. Though most segments under the broader technology seem to have shrugged off the selloff fears from late September, one corner that showed considerable resilience is semiconductors.

SPDR S&P Semiconductor ETF XSD is up 15.3% in the past month and 10.5% last week.This was in comparison with the tech-heavyNasdaq 100 ETF Invesco QQQ’s (QQQ) 5.8% monthly gain and 4.2% weekly gain. Broader tech ETF Technology Select Sector SPDR Fund’s XLK gains (one-month – 6.6%; one-week – 4.6%) also lagged the gains of the semiconductor ETFs.

Let’s take a look at the rally.

Biden’s Solid Chances of Winning

President Trump and his trade and tariff war with China and many other parts of the globe like Europe and Japan are known to all. Though the phase-one U.S.-Sino deal was signed in January, a full-fledged truce is yet to be seen.

Per Morgan Stanley equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52%” and are thus exposed to maximum risks if trade tensions spike. With a likely Biden presidency meaning no extreme U.S.-China trade tensions, the semiconductor space has every reason to soar higher.

Rise in M&A

The space is buzzing with mergers and acquisitions. Chip producer Xilinx added 17% on Oct 9 on talks that Advanced Micro Devices AMD may buy the former for more than $30 billion. In September, the chip industry benefited from Nvidia’s acquisition news of Arm Limited for $40 billion. The Nvidia deal was the biggest in the Semiconductor industry. As a result, the space soared massively last week (read: After A Record Q3, Can M&A Soar In Q4? ETFs In Focus).

Upbeat Sales Prospects

Taiwan Semiconductor Manufacturing (TSM) recently reported better-than-expected sales for the month of September, accentuating prospects for an upbeat third-quarter earnings season for semiconductor stocks. Such upbeat sales data from the world's leading chip foundry raised hopes for the entire industry. Better-than-anticipated notebook PC and handset production is likely to act as a tailwind for the company itself and the industry.

Apart from TSMC’s gains, the semiconductor space is likely to benefit from Qualcomm’s QCOM growing business from emerging Chinese smartphone makers, Oppo, Vivo and Xiaomi. 5G wireless upgrade cycle, including Apple's (AAPL) upcoming iPhone 12 handsets, should prove beneficial for the company.

Remote Activity & Cloud Computing to Drive Semiconductor Industry

The coronavirus outbreak boosted demand for cloud computing manifold on rising remote activity.Stay-at-home trends have been aiding demand for gaming chips and data center business.The cloud is in fact the biggest market for AI chips as its implementation in data centers continues to increase as a means of enhancing efficiency and reducing operational cost, per Deloitte. The accelerating speed of digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail has been enhancing the future for semiconductors.

Cheaper Valuation

Semiconductor ETFs are still cheaper than the Nasdaq 100 ETF Invesco QQQ QQQ. The priciest semiconductor ETF iShares PHLX Semiconductor ETF SOXX is now trading at nearly 29.50 times P/E, while QQQ is trading at a P/E 30.85X. The least-pricey semiconductor ETF PSI trades at a P/E of 23.94X.

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