SMH VanEck Vectors Semiconductor ETF

Currently, investors are fleeing from the Internet darlings on valuation and earnings concerns and are embracing the traditional tech giants like Intel (INTC), Hewlett-Packard (HPQ), Microsoft (MSFT) and Oracle (ORCL).

Out of these, Intel reported its Q1 earnings after the market closed yesterday. Though the world’s largest chipmaker missed slightly on the revenue front, it reported higher-than-expected earnings and gave an inspiring second quarter revenue outlook. This suggests an air of optimism in the sector, compelling many to look to this old-fashioned company amid weakness in the broad space (read: 3 ETFs with Most Exposure to Microsoft).

Intel Earnings in Focus

The company reported earnings of 38 cents per share, a penny above the Zacks Consensus Estimate but 2 cents below the year-ago earnings. Revenues rose 1% year over year to $12.76 billion and missed the Zacks Consensus Estimate of $12.82 billion. Strong demand for tablet processors and data center services was offset by still weak PC sales. This is because more than 80% of revenues still come from PC and server chips.

Intel plans to introduce chips for tablets and other popular devices and build chips for the other companies as well in order to offset slowing PC sales. In particular, the company is seeing strong sales for chips that powers the ‘Internet of Things’, which includes a huge array of household, retail, industrial, automotive and other gadgets that are being computerized and linked together. Revenues climbed 32% in this division during the quarter.

Intel expects revenues in the range of $12.5–$13.5 billion for the second quarter of 2014. The midpoint is higher than the Zacks Consensus Estimate of $12.97 billion. Gross margin is expected to be around 63%. For full fiscal 2014, revenue growth will likely remain flat year over year and gross margin would be around 61%.

Market Impact

Following earnings announcement, INTC shares rose nearly 3% in the after-market hours, sending the stock to its highest level in more than four years. In fact, the stock is up 4% so far this year when compared to 3.4% drop in the tech-heavy Nasdaq Composite Index. This reflects bullishness for the company in the days ahead (read: Technology ETFs: Pain or Gain Ahead?).

This is particularly true as the stock had a solid industry Rank (in the top 25%) at the time of writing as per the Zacks Industry Rank. Further, INTC currently has a Zacks Rank #3 (Hold), suggesting room for upside in the coming months.

ETFs to Consider

Investors seeking to tap the opportunity for the upcoming surge in INTC shares could consider the following ETFs. These funds have larger allocation to this biggest semiconductor company and are poised to move higher with the rise in stock price.

Market Vectors Semiconductor ETF (SMH)

This is easily the most popular and liquid ETF in the semiconductor space with AUM of $331.1 million and average daily volume of roughly 1.4 million shares. The fund provides concentrated exposure to 26 global securities by tracking the Market Vectors US Listed Semiconductor 25 Index. Intel occupies the top position with 17.76% of assets.

While U.S. firms dominate the fund holdings at 73.8% of assets, Taiwan (12.6%), the Netherlands (8.5%) and United Kingdom (5.1%) take the remainder in terms of country exposure. The fund charges an expense ratio of 0.35%. The fund lost around 3.5% over the past 10 days and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a ‘Medium’ risk outlook.

iShares PHLX Semiconductor ETF (SOXX)

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 31 firms. The fund has amassed $414.3 million in its asset base while trades in volume of more than 148,000 shares a day. The product charges a higher fee of 48 bps a year from investors (see: all the Technology ETFs here).

Here again, INTC takes the top spot at 8.55% of total assets. The fund lost nearly 4.6% in the past 10 trading sessions and currently has a Zacks Rank of 2 or ‘Buy’ rating with a ‘High’ risk outlook.

First Trust NASDAQ Technology Dividend Index Fund (TDIV)

This fund provides exposure to the dividend payers of the broad technology space by tracking the Nasdaq Technology Dividend Index. The product has amassed about $463.9 million in its asset base while charges 50 bps in annual fees. Volume is good as it exchanges about 134,000 shares in hand per day (read: 3 Excellent Dividend ETFs for Growth and Income).

In total, the fund holds about 89 securities in its basket. Of these firms, INTC takes the first spot, making up roughly 8.41% of the assets. In terms of industrial exposure, the fund allocates one-fourth portion in semiconductor and semiconductor equipment, followed by software (15.52%), and technology hardware, storage & peripherals (15.04%). The fund is down nearly 2% over the past 10 days.

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