Not The Time For Chips

Published on Monday, 14 May 2012 22:38 Written by Todd Shriber

There’s something to be said for trading based on seasonal trades, especially when a trader does the smart thing and that is to bet on the side of the trend that has shown a tendency to repeat itself year after year. To that end, it must be noted that the Nasdaq’s bullish eight-month cycle comes to an end in June, which is less than three weeks away.

The Nasdaq has been the leader of the three major U.S. indexes this year, but the tech-heavy benchmark has shown overt signs of weakness during the market’s recent pullback. Throw in the fact seasonal factors weight against the semiconductor sub-sector later in the summer, and now probably isn’t the time to be embracing tech and semiconductor stocks as buy-and-hold investments because better prices are likely to avail themselves in several months.

One semiconductor ETF you might want to put in your back pocket and save for later is the iShares PHLX SOX Semiconductor Sector Index Fund (NASDAQ: SOXX). The 31-stock ETF is now almost 11 years old, charges 0.48% per year and has almost $236 million in assets under management.

In many regards, SOXX is typical of what one would expect among semiconductor ETFs. The fund’s top-10 holdings represent almost 62% of the overall weight while just four stocks combine for a third of the total weight. That quartet is comprised of what can be called "usual suspects" stocks Taiwan Semiconductor (NYSE: TSM), Intel (NASDAQ: INTC), Texas Instruments (NASDAQ: TXN) and Broadcom (NASDAQ: BRCM).

SOXX has two primary rivals, the Market Vectors Semiconductor ETF (NYSE: SMH) and the SPDR S&P Semiconductor ETF (NYSE: XSD). Each is different from SOXX in terms of how they offer exposure to chip stocks. SMH is evenly more heavily concentrated to the sector’s largest names while XSD is more spread out across small-caps and mid-caps. That ups the risk/reward potential with that fund.

Year-to-date, the differences are noticeable as SMH has been the top performer of the trio with SOXX in the middle. XSD has curiously lagged bother by significant margins.

However, there is an additional source of allure regarding why SOXX could be an ETF to scoop up on some weakness later this summer and the factor extends well beyond seasonal trends. Several of SOXX’s components, including Broadcom, are parts suppliers to Apple (NASDAQ: AAPL). It’s almost impossible that tech stocks will rebound without Apple leading the charge and as additional incentive to consider this ETF perhaps even sooner than normal is the fact that new iPhone is due out later in the coming months. That alone could lift SOXX out of its seasonal funk.