Semiconductor ETFs Fueled By Genuine Demand?

Very few technology-based ETFs were up through the first 5 months of the year. As I pointed out in a recent column, Software (IGV) has been a relative outperformer.

Yet one sub-segment that is particularly surprising is the semiconductor space. Through 5/31, State Street Semiconductors (XSD) and Powershares Dynamic Semi (PSI) were up 2.1% and 1.8% respectively.

Equally impressive are the the 12-week returns. XSD picked up 26.3%, while PSI garnered 19.4%.

When it comes to "semis," though, it is important to discern whether the rally is tied to bargain buying across stock assets. Or, as some may hope, is it related to greater demand from the companies who need the chips to produce their goods.

Maybe it's both.

Recently revealed in the durable goods data at the web site Economic Indicators... semiconductor shipments jumped 25% from March to April. Info along these lines suggest that tech companies are optimistic for Q3 and Q4 of 2008.

However, some venerable voices have expressed caution. For instance, shouldn't actual sales numbers confirm the increase in shipments? And if so, how might one view a mere 1.3% rise in semiconductor sales in the "Americas" from March to April?

Historically, when semiconductor stocks are barreling ahead, it often means good things for the economy. In fact, the movement is frequently viewed as indicative of an economic rebound.

Unfortunately, there's the other possibility; that is, investors have simply been bargain-hunting in the beaten-down segment. If bargain hunting is the only reason, it may be prudent to remain diversified across tech.

Even if "semi" stocks are portending a strengthening economy, it is unlikely that a narrow semi focus will prove more rewarding than broader tech. I prefer exposure the segment at large through the iShares Dow Jones US Technology Fund (IYW).

Would you like to see why IYW is more advantageous? Review my post on why broader tech ETFs outperform narrow sub-sectors. Similarly, if you'd like to see why regional investments are more lucrative than single country ETFs, read my column on why regional ETFs maintain the upper hand.

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