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ETFZone.com There is no more hated sector than semiconductors, no more hated index than the Philadelphia SOX, and no more hated ETF than iShares Goldman Sachs Semiconductor (AMEX:IGW - News). IGW was the only ETF that lost money in 2004, and it lost over 15%. This outsized negative return meant that it radically underperformed all other ETFs, including its peers within the struggling technology sector. Just a week into 2005, IGW is already down almost 7%. It has fallen faster and farther than virtually any other ETF and is now trading at a level below the pre-election rally in November of last year. What is wrong with IGW? What is wrong with the semiconductors? When will the pain end? Trouble with semiconductors is not new. 2004 was a good year for chip sales, with revenues estimated at around $200 billion for the industry, but semiconductor companies overbuilt and overproduced. Despite strong chip sales, IGW faltered in 2004. According to IDC Research, which provides data on technology companies, expectations of high demand in 2004 led to a 48% surge in capital spending in the industry. By mid-year, supply significantly outpaced demand, and chip companies became saddled with inventory. IDC forecasts that in the first half of 2005 the industry will face some of the same trouble as last year: reduced capital spending, lower utilization, and pricing pressure. Growth estimates for the industry in 2005 vary, but most are negative or in the low single digits. The story is that businesses are reluctant to spend money on software or hardware. Last year the hot iPod MP3 player from Apple (Nasdaq:AAPL - News) motivated consumers to spend. Increasing consumer demand for electronic devices will be some help clearing semiconductor inventory in 2005. But there is currently no "must-have" technology equivalent to the iPod for business customers, and there is none on the immediate horizon. "Longhorn", the next-generation operating system from Microsoft (Nasdaq:MSFT - News), anticipated as a driver for corporate hardware spending, will not be available before 2006. Part of the reason for the sell-off in semiconductors is the poor performance of the technology sector more generally. Technology provided market leadership in the late 1990s and was a top-performing sector in 2003. But in 2004, many money managers sold appreciated technology shares and shifted funds to less highly valued sectors. In 2004, energy ETFs assumed the leadership mantle. Technically, IGW does not look good. It closed last week at 50.50, below its 50-day and 200-day EMA (exponential moving average). This technical situation is important because both short and long term traders watch the 50-day and 200-day EMA to assess price direction. IGW broke through support at about the 53 level. Technically IGW does not have support until the 48 level, and then again at 45. The one-year price chart of IGW shows IGW falling below its 50-day (green line) and 200-day (red line) EMA.  IGW's top five holdings tell a remarkably similar story. With the exception of Motorola (NYSE:MOT - News), which had new management installed at the end of 2003 and is more diversified than the other IGW holdings: Intel Corp (Nasdaq:INTC - News), STMicroelectronics (NYSE:STM - News), Applied Materials Inc. (Nasdaq:AMAT - News), and Texas Instruments (NYSE:TXN - News) all show price performance very similar to IGW and to each other. The one-year chart below compares the returns of IGWÂ's top five holdings: MOT, STM, INTC, TXN, AMAT.  On the other hand, IGW never looked better than it did exactly a year ago, in January of 2004. IGW's 75% return in 2003 put it among the top performing ETFs for that year. Forecasts for semiconductors were bright. Chip companies were expanding and increasing their capacity. But the contrarian bet paid off: January of last year was a time to sell IGW. The situation is the reverse now. The semiconductors are shunned, the forecast is gloomy. Maybe it is time to be contrarian again. Buying IGW in January (either as IGW crosses its EMA around the 53 level or falls to support at the 45 level) just may pay off in 2005. However, the play is not without risk. IGW's beta is 2.35, the second highest of any ETF, so even small market swings can produce big moves. Still, as bad as last year was, IGW was up almost 20% in the last two months. There will very likely be opportunities to buy this ETF this year. IGW bears close watching. Jonathan Bernstein has specialized in short-term trading of equities and equity options since 1998. | |||||||||||||||
