ETF Research and Analysis
by John GabrielSuitability
Semiconductor HOLDRs SMH offers relatively concentrated exposure to a handful of microchip stocks. Because of the fund's exclusive focus on just 18 semiconductor stocks, investors should treat SMH as a specialty satellite holding. Some investors might look to this ETF as an effective tool to make tactical bets on the extreme cycles that chip stocks tend to exhibit (that is, buy when capacity utilization gets tight and sell after a period of high capital intensity). Read more
Semiconductor HOLDRs SMH offers relatively concentrated exposure to a handful of microchip stocks. Because of the fund's exclusive focus on just 18 semiconductor stocks, investors should treat SMH as a specialty satellite holding. Some investors might look to this ETF as an effective tool to make tactical bets on the extreme cycles that chip stocks tend to exhibit (that is, buy when capacity utilization gets tight and sell after a period of high capital intensity). Read more
Bull Case
Top holding Intel reported strong third-quarter results, as demand for microprocessors continued to improve. The firm's fourth-quarter outlook was even more impressive, as management expects revenue to roughly reach pre-downturn levels.
Catalysts could come from new "killer" applications, such as flash memory, which spurred a whole round of capital investments from memory makers in 2006, or just an increase in global chip demand that requires chipmakers to spend heavily on chip equipment after a prolonged period of underinvestment.
If capacity utilization rates continue to increase in a sustainable manner, chipmakers will likely have to increase capital spending at some point.
Read moreBear Case
Chipmakers' improved revenue and business outlook is partly attributable to continued chip inventory replenishment across the various electronics supply chains. If optimistic expectations fail to materialize in the coming months or quarters, then the industry could be headed for another slump.
The portfolio is extremely concentrated. If our fair values on the top holdings are wrong, our overall opinion on this ETF could be wrong, as well.
With the HOLDR structure, investors essentially own the underlying stocks directly and can receive shares of spin-offs directly in their brokerage accounts. So, investing in a HOLDR requires a little more commitment than with other ETFs.
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