Semiconductor ETFs pull in cash

U.S. semiconductor stocks are attracting more cash than ever amid increasing demand for more complex computer chips in everything from wristwatches to cars.

Exchange-traded funds that buy semiconductor shares have absorbed almost $350-million in 2014, the most on record and the first inflows in five years, according to data compiled by Bloomberg. The iShares PHLX Semiconductor ETF has rallied 21 per cent this year and has seen its assets almost double.

New products, including the Apple Inc. iPhone 6 scheduled to start selling later this month, will help drive sales of electronic devices as the economy improves and consumers increase spending ahead of the holiday season, said Robert Stimpson, a fund manager at Oak Associates Ltd. in Akron, Ohio.

“There’s more upside,” Stimpson said in a phone interview. He helps oversee about $900-million, including shares of NXP Semiconductors NV and Cirrus Logic Inc. “There were reasons to be optimistic about capacity utilization and upcoming technologies that helped drive the group higher and none of those reasons will change in the next six months.”

The rally in computer-chip makers has created more demand for bullish options. Intel Corp. calls that pay should the shares rally 10 per cent cost 2.7 points less than bearish puts, according to data on three-month contracts compiled by Bloomberg.

Holiday season
The four options on Intel with the highest ownership were all calls. The stock is up 35 per cent this year.

“Business has been good,” said Anand Srinivasan, a senior analyst on semiconductors with Bloomberg Intelligence in New York. “Consumer spending on electronics is driven heavily in the second half in the U.S. through back-to-school and into the holiday season.”

Apple unveiled a mobile-payments system alongside larger– screen iPhones yesterday and introduced Apple Pay, which is designed to make iPhones into a digital wallet.

A one-time increase in demand for replacement office computers may be contributing to gains in semiconductor shares, said Stacy Rasgon, a senior analyst at Stanford C. Bernstein & Co. in New York. Microsoft Corp. ended product support and security updates for the Windows XP operating system in April, prompting a wave of upgrades in offices still running the software first introduced in 2001.

Temporary boost
“At least some of it is temporary,” Rasgon said in a phone interview from Los Angeles.

In the four years before 2014, investors withdrew $407-million from semiconductor ETFs even as the shares rallied, according to data compiled by Bloomberg on the six largest funds that track the industry. The list includes ETFs from BlackRock Inc.’s iShares, State Street Corp. and leveraged ones from Direxion Investments and ProShares.

Dividends and share buyback plans have made semiconductor stocks increasingly attractive, according to Matthew Ramsay, an analyst with Canaccord Genuity Inc.

Among stocks in the Philadelphia Semiconductor Index, Maxim Integrated Products Inc. and Microchip Technology Inc. have the highest dividends with yields above 2.9 per cent. In March, Qualcomm Inc. boosted its quarterly dividend by 20 per cent and added $5-billion to its share buyback plan.

“In this type of interest rate environment, being short some of the companies that have the best capital return programs and dividend yields in the space is something investors are shying away from,” Ramsay said.