4 Funds To Make The Most Of The Chip Market Boom

U.S. chipmakers wrapped up a banner year. A stupendous performance by the chipmaker industry in 2019 boosted the overall tech sector. Continued innovation in the chip-making industry last year and China's dependence on U.S.-made chips and semiconductors were pivotal in shaping up the sector’s fortunes.

The iShares PHLX Semiconductor index (SOX) rose by as much as 60.1% through 2019. The index’s rally last year was its strongest performance since 2009, mostly driven by strong chip earnings and investors' optimism over a U.S.-China trade agreement.

US Chip Design Tech Vital for China

A reason behind China's need for U.S. technology is the country's dependency on precise U.S. semiconductor technologies for its technology-intensive supply chains and products.

For the development of China's supply chains, the country requires tools that create hardware and software that, in turn, are used in designing integrated circuits (ICs), which enable computer chips to function.

The global chip design tools industry is dominated by just four U.S.-based companies namely Synopsys (NASDAQ:SNPS), Inc., Cadence Design (NASDAQ:CDNS) Systems, Inc., ANSYS, Inc. and Mentor Graphics. According to S2C data, together, these four companies control 90% of the global market (as of 2018).

US-China Trade Deal to Push Chipmakers

This dependency on top-notch U.S. semiconductor companies on China's part makes the U.S. chip industry so critical. Second, since chipmakers form the majority of prominent U.S. companies with revenue exposure to the Asian country, these have also been at the forefront of the U.S.-China trade war.

According to Evercore ISI, China was responsible for 35% of global semiconductor sales in 2018 and is the biggest market in the world for chip-enabled products.

After all, semiconductors are a crucial component of almost every vital, in-demand tech product. These chip-enabled products are part of everything, including those under the tariff fire. As a trade agreement between the two countries is imminent, the chip-making industry could definitely get a boost as demand for chip-dependent products increases in both countries.

The long-fought tariff war is finally deescalating, with the much-awaited phase-one U.S.-China trade deal set to be signed on Jan 15. This agreement is not only expected to protect U.S. intellectual property but will also allow U.S. companies to access the fast-growing China market.

4 Funds to Buy

We have, therefore, selected four mutual funds that carry a Zacks Mutual Fund Rank #1 (Strong Buy) or 2 (Buy) and invest in companies that could gain most from the growth in semiconductor industry. In addition, the minimum initial investment is within $5,000.

We expect these funds to outperform their peers in the future. Remember, the goal of the Zacks Mutual Fund Rank is to guide investors to identify potential winners and losers. Unlike most of the fund-rating systems, the Zacks Mutual Fund Rank is not just focused on past performance but also on the likely future success of the fund.

The question here is why should investors consider mutual funds? Reduced transaction costs and diversification of portfolio without several commission charges that are associated with stock purchases are primarily why one should be parking money in mutual funds (read more: Zacks Investment Research

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Written By: Zacks Investment Research