My wife thinks my car has magic.
She just loves how when we approach the car when I’m carrying my keys, LED lights inside the side view mirrors automatically turn on.
Not only that, but the moment I touch the car-door handle, the side view mirrors automatically deploy from their tucked-in sleeping position. The headlights also come alive.
Trust me when I say this… that feature is a godsend at night during California’s rainy season, which was historic this winter.
I’m tempted to say that my state-of-the-art 2019 Acura MDX Hybrid has all the proverbial “bells and whistles.”
But that’s not quite accurate. Simply stated, it is brimming with advanced sensors and chips that lie at the heart of the modern auto market.
Here’s the thing. Putting these devices into today’s cars is so vital a trend that it recently led to the $9.4 billion buyout of Cypress Semiconductor Corp. (Nasdaq:CY) by Infineon Technologies AG (OTC:IFNNY).
That’s why today, I want to show you a great way to play this red-hot tech trend with a market-beating investment you can count on for the long haul…
The Shift Toward Computers on Wheels
I’ve been a car guy for as long as I can remember. Growing up near south Kansas City, Missouri, for a time, I lived right across the street from a professional race-car driver.
My friends and I used to visit his shop. We also built tons of model cars. I later taught myself auto mechanics and rebuilt the engine in my first car, a classic 1966 Pontiac Le Mans.
But I really began to pay attention to the role of high tech in modern automobiles when I was an auto analyst in Detroit in the early 1980s, at the dawn of modern auto electronics.
So I can tell you from deep, first-hand experience that today’s new cars are basically computers on wheels.
But don’t take my word for it.
Electrical Engineering Timessays that $152 billion was spent on automotive electronics systems last year. That figure is growing nearly 8% annually, and will hit $304 billion in just nine years.
A big part of this spending will be on chips. IHS Markit says that the dollar content of chips in cars is also rising around 8% per year, and should itself be a $58.5 billion market by 2023.
And don’t forget that electric vehicles (EVs) and hybrids need even more tech components. IHS Markit says that 2017, only about 1.6% of all vehicles sold were either EV or hybrid. By 2040, that figure should surge to 30%.
Add it all up, and you can see this is a very target-rich market for savvy tech investors.
A Symbolic Merger
Proof of that comes from the merger I noted earlier. After Infineon completes the purchase of Silicon Valley legend Cypress, it will be the world’s largest maker of auto chips.
Turns out, this merger actually is symbolic of an even larger trend – a rapid consolidation of the chip sector as the world goes totally high tech across the board. Just take a look at these other recent deals:
- In late May, NXP Semiconductor N.V. (Nasdaq:NXPI) said it will buy Marvell Technology Group Ltd.’s (Nasdaq:MRVL) wireless connectivity portfolio for $1.76 billion.
- Earlier that month, Marvell agreed to buy two chipmakers: Aquantia Corp. (NYSE:AQ) and Avera Semiconductor for a combined $1.2 billion.
- And at the end of the first quarter, ON Semiconductor Inc. (Nasdaq:ON) announced an agreement to buy Quantenna Communications Inc. (Nasdaq:QTNA) for $1.07 billion.
- Just a few weeks before that, Nvidia Corp. (Nasdaq:NVDA) agreed to buy Mellanox Technologies, Ltd. (Nasdaq:MLNX) for $6.9 billion.
That’s a lot of action in a short burst of time. But it underpins one key theme. The world’s biggest chip makers are getting even bigger, and with greater scale, they can deliver even better profit margins.
Profiting from the Entire Sector
In a case like this, I believe is pays to have access to all the technology and profits emerging from the entire sector.
And that’s where the iShares PHLX Semiconductor ETF (Nasdaq:SOXX) comes into play.
The fund carries a reasonable 0.47% expense ratio and makes large and concentrated investments in the world’s top chip makers.
You’ll find almost all of the chip firms I noted above in this portfolio, along with other semiconductor firms poised to profit from other key tech trends. Let’s take a closer look:
- SOXX carries a 10% weighting in Qualcomm Inc. (Nasdaq:QCOM), a firm that has had a major role in the current wireless telecom juggernaut. Almost every cell phone, cell tower and switching center either has Qualcomm chips inside, or uses tech licenses sold by Qualcomm. Now, with 5G high speed wireless tech set to take root, Qualcomm has a fresh growth driver in place.
- Texas Instruments Inc. (NYSE:TXN) is another top holding. This chipmaker builds the most advanced chips in a range of segments. That ensures premium pricing and robust profit margins. Market domination doesn’t come easy. Texas Instruments spends a whopping 25% of its adjusted earnings on R&D. This smart business model helps Texas Instruments boost its payout at a steady and strong clip. The current dividend produces around 2.6% in yields for investors, and the payout should keep rising higher.
- Nvidia, which I wrote about recently, is another major holding. As I said then, Nvidia is emerging as a key supplier in the advanced auto market. The firm’s Nvidia Drive AGX platform is based on a series of chips that enable key self-driving functions, such as sensor fusion and perception.
Make no mistake. This is a well-run fund – and has the returns to prove it.
The ETF’s 18.5% yearly return over the past decade proves that an “invest in the best” approach really pays off.
And that means it is the kind of fund you can count on for the long haul.
In other words, you can ignore the market’s current noise, and know with a high degree of confidence that this winning ETF will continue to pile up profits for many years to come.
The New American Dream… for as Little as $50
Now, I can’t leave you today without sharing something really exciting.
Come Tuesday, June 25th, Shark Tank’s Robert Herjavec is pulling back the curtain on the latest (and easiest) way to make money in America. It’s the only place he experiences the same returns as he has seen from his own businesses.
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Cheers and good investing,
Michael A. Robinson