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ETF Specialist

Finding Value in Semiconductor Firms

Those who take a contrarian view and are willing to brave potentially choppy near-term winds in coming months should consider this ETF.

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In recent months, the semiconductor sector has come under pressure. Investors have soured on chipmakers amid softening demand that has been caused by continued uncertainty in Europe and a less-than-stellar personal-computer market. The entire sector has fallen by 13% in the past three months, driving down exchange-traded funds that track the semiconductor industry. For a contrarian investor, however, the time to consider investing may be approaching. Earnings reports are just around the corner, and whether chipmakers disappoint or not, industry players will at least clear up some level of uncertainty. And there are good reasons to expect a longer-term rebound for the sector. Although the PC end market may well be stalled, the industry stands to continue to benefit from the new releases of a wide variety of technology products, such as  Apple's (AAPL) new iPhone and computer hardware makers' new Ultrabook innovation. Also, as the economy continues its long slog toward recovery, we expect corporate spending on IT--and especially on data center technology and networking infrastructure, both of which need semiconductors--to remain strong.

We recommend  Market Vectors Semiconductor ETF (SMH) as the most appropriate way to tap into the semiconductor market. The fund holds 25 of the largest semiconductor players, has an attractive 0.35% price tag (tied for the lowest relative to all of its peers), and trades at a compelling 85% of its fair value. By comparison, other broad-based tech ETFs are not trading at such discounts, nor is the broader market as a whole. For example,  SPDR S&P 500 (SPY) trades at 89% of fair value, while  Technology Select Sector SPDR (XLK) trades at 89% of fair value,  Fidelity Nasdaq Composite Index Tracking (ONEQ) trades at 92% of fair value, and  PowerShares QQQ (QQQ) trades at 89% of fair value.

Robert Goldsborough does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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