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Long/Short Investments in L/S Equity: Valuation and Ideas,

Investing In Semiconductors?

Over the past 1-2 years, semiconductors have provided some of the best returns on the market.

During the financial crisis, tech stocks bottomed a bit sooner than the overall market, around November 21, 2008. Since then, semis have appreciated by a factor of 6.3x, above the 3.6x of the broader market and equivalent to about 24% annualized.

Investing in individual names can be volatile and also requires keeping up with the competitive landscape. It’s not a zero-sum game, but AMD and NVDA’s success has largely come at the expense of INTC, the latter of which has seen its stock price do nothing for the past three years.

For those who want to bet on the broader trend in semiconductor growth, but want less volatility and less of their overall portfolio’s returns contingent on a few stocks, indexing is one such option. State Street SPDR’s XSD fund is the most popular on the market with 35 semiconductor holdings.

The semiconductor industry is cyclical, so it’s nonetheless common for this fund to go through 1-3 year periods where capital appreciation doesn’t occur. However, with semiconductors such a vital component of the various computing devices we own – from computers, smartphones, among other digitial technologies that the economy is shifting toward – this technology will be relied upon to operate these various devices.

The fund is constructed with a bias toward small and micro cap stocks (43%) versus large cap (31%) and mid cap (26%).

This makes the fund fairly volatile by equity ETF standards (24.9% annualized volatility since inception versus 14.4% for the S&P 500 over that same timeframe). But it also provides potential growth opportunities for those bullish on the sector long-term. The fund is also heavily slanted in favor of US firms.

The full list of holdings is below: