Semiconductor stocks, often viewed as a bellwether segment in the technology sector, are coming off a rough year. In 2018, the PHLX SOX Semiconductor Sector Index, one of the most widely followed gauges of chip stocks, slipped 6.50%. That drop was nearly 200 basis points worse than the S&P 500's .
While semiconductor stocks and mutual funds are rebounding to start 2019, some analysts are less than enthusiastic about the group. Morgan Stanley recently lowered its outlook on the semiconductor group, citing deteriorating conditions .
Several of the industry's marquee names have also warned about slack demand over the coming quarters. Still, there are some compelling long-term data points to consider when evaluating semiconductor stocks and mutual funds to invest in.
"The worldwide semiconductor memory market is anticipated to develop at quick pace over the estimate time frame attributable to growing popularity for smartphones and introduction of technologically innovative smart devices," according to Acumen Research and Consulting . "Rapidly increasing mobile computing and rising penetration of Solid-State Drives (SSD) is likewise foreseen to drive the growth of worldwide semiconductor memory market over the forecast time period."
Here are the five best mutual funds for contrarian investors to invest in the semiconductor space.
Fidelity Select Semiconductors Portfolio (FSELX)
Expense Ratio: 0.75%, or $75 annually per $10,000 invested
Compared to some of the exchange-traded funds (ETFs) in the semiconductor universe, the Fidelity Select Semiconductors Portfolio (MUTF: FSELX ) is pricey with an annual fee of 0.75%, but investors can realize some cost savings with one of the best mutual funds for semiconductor exposure because Fidelity clients can transact in FSELX free of commissions .
Adding to the case for FSELX as one of the best mutual funds for semiconductor exposure is the fund's long-term track record. This Fidelity fund has a lengthy history of outperforming the S&P 500, broader technology benchmarks and some well-known semiconductor indexes.
FSELX is a top-heavy fund as its top 10 holdings combine for almost 70% of the fund's weight. That group includes Broadcom (NASDAQ: AVGO ), Applied Materials (NASDAQ: AMAT ) and Nvidia (NASDAQ: NVDA ).
Fidelity Advisor Semiconductors Fund - Class A (FELAX)
Expense Ratio: 1.15%
The Fidelity Advisor Semiconductors Fund - Class A (MUTF: FELAX ) is one of the best mutual funds for investors looking for actively managed exposure to chip stocks. FELAX's primary manager is Steve Barwikowski, who has more than 10 years managing this fund.
FELAX has a four-star Morningstar rating and its top 10 holdings represented nearly 71% of the portfolio at the end of last year. As is to be expected, there is some holding overlap between FELAX and the aforementioned FSELX. Not surprisingly, most of FELAX's holdings are classified as growth stocks, primarily large- and mid-cap growth names.
iShares PHLX Semiconductor ETF (SOXX)
Expense Ratio: 0.47%
The iShares PHLX Semiconductor ETF (NASDAQ: SOXX ) is not a mutual fund. It is an ETF, but ETFs are descendants of mutual funds, so a case can be made that SOXX is one of the best mutual funds for those looking for semiconductor funds to invest in. One of the factors making SOXX one of the best mutual funds for chip stocks is cost efficiency relative to the category average.
SOXX tracks the aforementioned PHLX SOX Semiconductor Sector Index and holds 30 stocks. Most semiconductor funds, including the best mutual funds, are concentrated in terms of roster size. As a cap-weighted fund, SOXX is also concentrated in terms of how many stocks really drive the fund's outcomes. Broadcom, Qualcomm (NASDAQ: QCOM ) and Intel (NASDAQ: INTC ) combine for nearly a quarter of the fund's weight.
With a three-year standard deviation of 19.55% , SOXX reflects the volatile nature of the semiconductor space and other semiconductor funds, but its price-to-earnings ratio of just over 15 implies some attractive valuations for an industry that usually trades at a premium to the broader market.
ProFunds Semiconductor UltraSector Investor Class (SMPIX)
Expense Ratio: 1.46%
The ProFunds Semiconductor UltraSector Investor Class (MUTF: SMPIX ) is one of the best mutual funds for traders looking for some added juice on the semiconductor trade. SMIPX is designed to deliver 1.5 times the daily returns of the Dow Jones U.S. Semiconductor Index.
That means that if that index rises 1% on a particular day, SMPIX should add 1.5%. Leveraged funds, be they mutual funds or ETFs, are particularly useful for active, risk-tolerant traders when there are looming catalysts. Earnings season could do the trick for SMPIX.
From Jan. 22 to Feb. 18, about 72% of the PHLX Semiconductor Index's components report earnings, making SMPIX one of the best mutual funds to consider during that three-week span.
SPDR S&P Semiconductor ETF (XSD)
Expense Ratio: 0.35%
There are a limited number of dedicated semiconductor funds, so as was noted earlier, some of the best mutual funds in this space are actually ETFs. The SPDR S&P Semiconductor ETF (NYSEARCA: XSD ) follows the S&P Semiconductor Select Industry Index, which is an equal-weight benchmark.
That eliminates some of the concentration risk associated with cap-weighted semiconductor funds. None of XSD's 35 holdings account for more than 3.48% of the fund's weight. Many equal-weight funds are driven by exposure to smaller stocks, but XSD is a large-cap fund as highlighted by a weighted average market capitalization of $25.76 billion for its components.
Following a sour performance in 2018, XSD is off to a strong start this year with a year-to-date gain of almost 4%.
As of this writing, Todd Shriber did not own a position in any of the aforementioned securities.
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