2024-01-18 14:04:28 ET
Summary
- We explore how Invesco Semiconductors ETF stands versus the most popular ETF in this space: VanEck Semiconductor ETF.
- We touch upon some of the underlying conditions in the industry which look more promising now.
- We close with some thoughts on the technicals and the valuations.
ETF Snapshot
The Invesco Semiconductors ETF ( PSI ) is a $650M-sized product that offers focused access to stocks that either manufacture semiconductors, test chips for third parties, or those that provide equipment or services linked to the manufacturing of these chips.
How Does PSI Compare To Its Largest Peer?
To better understand PSI, we thought we juxtapose it against its largest peer: the VanEck Semiconductor ETF ( SMH ). Note that despite coming to the markets 6 years after PSI's inception, SMH has still managed to accumulate assets under management, or AUM, that are 1.8x that of the former.
Seeking Alpha, Morningstar, ETF.com
SMH also has the qualities to work as a fine trading vehicle for investors with shorter time horizons, and this is reflected in the mammoth difference between the respective average daily dollar volume of both products. Note also the minute difference between the bid and ask of SMH over the last 45 days, which averages to a miserly rate of just 0.01%; in contrast, it appears that the bid-asks are a lot further spread out for PSI, with an average spread rate that is 9x higher! Considering these qualities, it's no surprise to discover that SMH also attracts a decent enough cohort of short-sellers (as things stand, the short interest on SMH is almost 15%, whereas, for PSI, it is nothing to shout home about).
From a yield angle, PSI comes across as less compelling, even though it has been growing its dividends at a much more rapid pace in recent years.
PSI's relatively low popularity could be largely driven by its steep expense ratio of 0.57%, which is around 22bps higher than SMH's. Also, even though there isn't a massive gap between the number of stocks that these two ETFs cover, note that PSI certainly doesn't come across as a stable product. It has an inordinately high annual turnover rate of 108% (in the previous year the turnover rate stood at 83). In contrast, SMH is a lot more stable, with a respectful turnover rate of just 18%.
PSI's need to resort to significant churn could perhaps be a function of it also using a price momentum screener (besides screeners for earnings momentum, quality, value, and management quality) in its stock selection process.
Using all these screeners could be justified if PSI had the results to show, but note that since SMH's inception to date, the latter has managed to deliver better returns by 1.26x.
SMH's superiority doesn't just come through via the absolute total return narrative; it even does a better job in delivering excess returns for the per unit risk taken. This is regardless of the time frame in question.
Also consider that SMH is heavily exposed to the biggest stocks in the semi-universe (48% of the top holdings), and offers no coverage to small or micro-caps whatsoever. Whereas at least 27% of PSI's portfolio comes from the riskiest side of the market (small and mid-caps), and this leaves a mark on the overall volatility profile of the ETF which is over 400bps higher.
Industry Commentary
Fundamentally, it looks like the semiconductor market is now in a much better place. Data from the chief industry body - the Semiconductor Industry Association ((SIA)) - shows that the worst appears to be behind us, and we could now be on the cusp of consistent monthly growth, particularly considering the weak double-digit base that will likely hold all the way until July or so.
Positive growth here has been a long time coming, as even in FY22 as a whole, growth was only flattish. All-in-all, for the FY last year it looks like the industry could have taken a double-digit hit of -11%.
Looking ahead, Gartner now believes that the global semiconductor market will likely deliver solid growth of 17% this year. To get a sense of how strong sales could be note that despite a likely steep base effect in the FY24 period, even the FY25 growth levels could hover around healthy double-digit growth of levels of 15-16%, even as industry sales cross $720bn. Interestingly enough, Gartner's forecasts for the market are one of the more conservative forecasts, as the other haloed market intelligence institution - IDC suggests that the industry could well grow by 20% by this year!
The growing demand for AI servers will only continue to necessitate the presence of even more semiconductor content, and that could be a key tailwind for growth over the next two years. Then after a difficult couple of years characterized by excess inventories in the channels, it looks like semi sales linked to PCs and smartphones could start to have renewed momentum. For instance, after 7 quarters of decline, global PC shipments in Q4 last year started growing again. Traditionally the semiconductor industry hasn't had periods where it has been able to enjoy a lot of pricing strength, but a step-up in demand for AI-capable PCs and smartphones could bring some useful pricing strength.
Closing Thoughts - Is PSI A Good Buy Now?
As implied previously, structurally, we think PSI has a few flaws, but if you're willing to overlook that and still want to engage with this product, here's what the charts and the valuations are suggesting.
On PSI's standalone chart, it looks like over the last 18 months, the ETF has continued to trend up within a certain ascending channel. Considering where the two boundaries of the ascending channel are currently, an entry now would represent roughly fair reward to risk. Nonetheless, given the inherently volatile nature of stocks in this industry, investors may want to wait for an even greater pullback somewhere closer to the lower boundary of the channel, before a long position is considered.
Another reason why we think a long position may not be a straightforward bet is because of how overextended the semi-pocket still looks, relative to the overall stock market. The chart below highlights how PSI's holdings are positioned relative to the broad market, and we can see that the current relative strength ((RS)) ratio is almost 40% higher than the mid-point of its long-term range.
The valuation quotient of PSI too isn't overly compelling relative to the broader markets. Morningstar data suggests that PSI's holdings could deliver long-term earnings of 12% , only a percent more than what the broader markets are likely to deliver. Yet PSI is priced at an elevated P/E of 22.2x, 14% more than what the Vanguard Total Stock Market is priced at.
All things considered, we don't think Invesco Semiconductors ETF would make a good BUY at this juncture and would rather go with a HOLD rating for PSI.
For further details see:
PSI ETF: Industry Conditions Are Looking Up, But We'll Give This A Pass