Last week, Ford (NYSE: F) announced plans to cut North American vehicle production in July.
The reason? A massive shortage of semiconductor chips.
Cars today more closely resemble iPhones than the Model T. That’s why a lack of computer chips has forced Ford’s production lines to a screeching halt.
As Jim Rogers, co-founder of the Quantum Fund, has remarked, “No one can revoke the law of supply and demand.”
Whenever demand exceeds supply, someone somewhere is going to make a lot of money.
That’s good news for semiconductor companies.
Today’s State of Play
The semiconductor market is on fire.
The pandemic accelerated the arrival of the digital economy by a decade. This shift spurred demand for the thousands of devices that depend on semiconductors.
Jensen Huang, CEO of Nvidia (Nasdaq: NVDA), believes that demand for semiconductors could outstrip supply for years.
That threatens the availability of everything from laptops to video games to Teslas. But the shortage is only getting started…
Semiconductors are the backbone of a technology-driven economy. Think of them as the picks and shovels in today’s digital gold rush.
Cloud computing, artificial intelligence and machine learning, 5G networks, online gaming, blockchain, cryptocurrencies, the Internet of Things, autonomous vehicles, virtual reality, and wearables all require semiconductors.
Throw in changes in consumer behavior like remote work, web-based learning, videoconferencing, video gaming, social media, streaming and online shopping, and you have tailwinds for semiconductor stocks as far as the eye can see.
The Chinese Wild Card
Semiconductors have become pawns in the high-stakes game of geopolitical security.
In a little-reported story, Chinese President Xi Jinping pledged last Thursday to complete “reunification” with Taiwan. He vowed to “smash” any attempts at formal independence.
Taiwan is a perennial political hot potato in Chinese-American relations. The soaring importance of semiconductors only adds fuel to the fire.
Taiwan is home to the world’s largest chip manufacturing industry. Taiwan Semiconductor Manufacturing (NYSE: TSM) alone accounts for more than 50% of the global semiconductor market.
The U.S. will never allow the Chinese Communist Party to take over such a critical industry.
Meanwhile, China has been stockpiling semiconductor chips made in the U.S. due to fears that the Biden administration could cut China off amid rising political tensions.
How to Invest in the Boom
All this is excellent news for U.S. semiconductor stocks.
Last Wednesday, Micron Technology (Nasdaq: MU) reported stellar third quarter fiscal 2021 results.
Consensus estimates for Nvidia now project fiscal 2022 earnings growth of 58.4%. Likewise, Applied Materials (Nasdaq: AMAT) expects earnings to soar 56.6% year over year.
The list goes on…
I see three options for investors.
First, you could invest in the major U.S. semiconductor stocks. Earnings growth is excellent. And analysts are continually revising earnings estimates upward.
Second, you could buy an exchange-traded fund (ETF) like the iShares Semiconductor ETF (Nasdaq: SOXX).
This ETF tracks the ICE Semiconductor Index, which reflects the performance of the 30 largest U.S. companies that manufacture semiconductors, utilize LED and OLED technology, or provide related services or equipment.
The iShares Semiconductor ETF’s top 10 holdings include the best of the U.S. semiconductor giants.
Finally, you could place a leveraged bet on the semiconductor sector through the Direxion Daily Semiconductor Bull 3X Shares ETF (NYSE: SOXL).
Like the iShares Semiconductor ETF, this ETF tracks the performance of an underlying semiconductor sector index, but it does so with triple leverage.
(The Direxion Daily Semiconductor Bull 3X Shares ETF currently follows the PHLX Semiconductor Sector Index. On or about August 25, 2021, the ETF’s underlying index will change to the ICE Semiconductor Index.)
The chart above compares the returns over the past year of the S&P 500, the iShares Semiconductor ETF and the Direxion Daily Semiconductor Bull 3X Shares ETF.
As always in a bull market, the triple-leveraged ETF offers the best returns – though often at a price: gut-wrenching volatility.
(Keep in mind that the Direxion Daily Semiconductor Bull 3X Shares ETF rebalances daily, so returns can vary significantly due to triple exposure to its underlying index over longer periods.)
The bottom line?
If you want to profit from a diversified bet on semiconductors, consider the iShares Semiconductor ETF.
The booming demand for semiconductors should help ensure that it continues to outperform the S&P 500.
However, if you want to swing for the fences and your stomach can handle it, take a chance with the Direxion triple-leveraged option.
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