I updated an analysis that I did of the Philadelphia Semiconductor Stock Index (SOX) performance that I had done November 2105. The first part of the analysis provides a historical perspective and some simple analytics. The second part compares the SOX to standard benchmarks such as the S&P 500. The final section compares a simple momentum rule to a "Buy and Hold" investment strategy in the SOX. This analysis adds: 1) a section on how the SOX performs wrt recessions , 2) correlation analysis between the SOX and the NASDAQ and S&P 500, and 3) the use of a recession filter when applying momentum. Results are also updated as of March 31, 2016.

1. ARA Research
ARA (April’16)- © 2016 -
ARA Research
Philadelphia Semiconductor
Sector (SOX) Index Analysis
A.R. Alvarez
April 2016

2. Semiconductors
ARA (April’16)- © 2016 - 2
ARA Research
SOX Index Analysis – What’s New
 Data Updated to March 31, 2016
 SOX Index vs. U.S. Recessions 13 -17
 Correlation to NASDAQ / S&P500 20 - 21
 Adding Recession Filter to SOX 38 - 41
Momentum Investing

3. Semiconductors
ARA (April’16)- © 2016 - 3
ARA Research
SOX Index Analysis Outline
 SOX Index History 4 - 12
 SOX Index vs. U.S. Recessions 13 - 17
 SOX Index vs. U.S. Benchmarks 18 - 26
 SOX Index Momentum Analysis 27 - 41
 Appendix: SOX Background 42 - 50

4. Semiconductors
ARA (April’16)- © 2016 - 4
ARA Research
SOX Index History
ARA ResearchARA Research

5. Semiconductors
ARA (April’16)- © 2016 - 5
ARA Research
SOX Index Companies
 SOX Established Dec 1993; Options Trading
Started Sept 1994; Split 2:1 July 1995
 Top 30 Semi Companies By Market Cap
 Of 16 Companies on Index Sept 1994:
 Eight Still on Index (ADI, AMAT, CY, IDTI, INTC, MU,
TER, TXN)
 Five Were Bought (IRF, LSI, MOT, NVLS, NSM);
Acquiring Company on Index
 Three Dropped Off (AMD, LSCC, VLSI)
 Index Weight Limited to ~8%; Limits Impact
of Larger Market Cap Companies (Broadcom
/ Avago a Temporary Exception)
 Market vs. Index Modified Market Cap
 Aggregate MC ~$750B vs. Index MMC~$450B
 Max Company MC: Intel $151B vs. ~$35B Index MMC;
Similar to TI Which Has MC of ~$59B)
 Median Index MMC ~$15B, Market Cap ~$11B (Maxim)
 Min Semi Company Market Cap Si Labs ~$1.9B
Note: Green Highlights companies added since Oct’15 (replace Atmel, KLA-Tencor, and Sandisk)
Ticker Name
Weight
(%)
Index
MMC
($B)
Market
Cap
($B)
ADI Analog Devices, Inc. 4.0 $18 $18
AMAT Applied Materials, Inc. 4.0 $18 $24
ARMH ARM Holdings plc 1.4 $6.2 $19
ASML ASML Holding NV 1.8 $8.2 $41
AVGO Broadcom (Avago) 11.6 $52 $59
CAVM Cavium, Inc. 1.0 $4.7 $3.2
CY Cypress Semiconductor 0.9 $4.2 $2.6
IDTI Integrated Device Tech 0.9 $4.0 $2.7
INFN Infinera Corporation 0.7 $3.1 $2.1
INTC Intel Corporation 7.8 $35 $151
LLTC Linear Technology Corp 3.6 $16 $11
LRCX Lam Research Corp 4.1 $18 $13
MCHP Microchip Technology Inc. 3.3 $15 $11
MPWR Monolithic Power Systems 0.8 $3.8 $2.5
MRVL Marvell Technology Group 1.7 $7.5 $5.1
MSCC Microsemi Corporation 1.4 $6.2 $4.1
MU Micron Technology, Inc. 3.6 $16 $11
MXIM Maxim Integrated Products 3.4 $15 $11
NVDA NVIDIA Corporation 4.2 $19 $20
NXPI NXP Semiconductors NV 4.3 $19 $29
ON ON Semiconductor 1.3 $6.0 $4.1
QCOM Qualcomm Incorporated 7.4 $33 $77
QRVO Qorvo, Inc. 2.1 $9.3 $5.9
SLAB Silicon Labs 0.5 $2.4 $1.9
SUNE SunEdison, Inc. 0.0 $0.2 $0.2
SWKS Skyworks Solutions Inc. 3.9 $18 $14
TER Teradyne Inc. 1.4 $6.2 $4.2
TSM Taiwan Semiconductor Mfg 7.2 $32 $130
TXN Texas Instruments Inc. 8.0 $36 $59
XLNX Xilinx Inc. 3.5 $16 $12
Market Close April'20 2016 1.0 $450 $747

6. Semiconductors
ARA (April’16)- © 2016 - 6
ARA Research
SOX Index Employs Algorithm to Limit Contribution of Largest Market
Cap Companies; Balances Bi-Modal Nature of Market Cap
SOX Company Market Caps
Market Cap of Companies in SOX ($B)
Data as of April 20, 2016

7. Semiconductors
ARA (April’16)- © 2016 - 7
ARA Research
SOX Index Cycles
SOX Index Has Exhibited 8 Cycles (Defined as ±30%) Since Inception
Through March 31, 2016

8. Semiconductors
ARA (April’16)- © 2016 - 8
ARA Research
SOX Index Cycle Min-Max
The Median “Up” Cycle was 123% vs. a Median “Down” Cycle of -57%, But The
Distribution Was Bi-Modal, Consistent with the SOX’s Relatively High Volatility
Median Min Max
Up 123% 50% 496%
Down -57% -69% -22%
Neutral 3% -4% 9%

9. Semiconductors
ARA (April’16)- © 2016 - 9
ARA Research
SOX Index Cycle Lengths
The Median “Up” Cycle Length was 19 Mths vs. a Median “Down”
Cycle Length of 10 Mths
Median Min Max
Up 19 6 30
Down 10 7 17
Neutral 14 11 17

10. Semiconductors
ARA (April’16)- © 2016 - 10
ARA Research
SOX Index vs. Semi Revenue
SOX Has Historically Served as Leading Indicator for Semi Revenue
Through March 31, 2016

11. Semiconductors
ARA (April’16)- © 2016 - 11
ARA Research
SOX / Semi Sales Ratio
Avg Std Dev
1995 - 1999 26 9
2000 - 2004 39 16
2001 - 2009 20 4
2010 - 2014 18 3
1995 - 2016 25 12
SOX / Semi Sales Ratio ~20 Over Past 10+ Years
Through March 31, 2016

12. Semiconductors
ARA (April’16)- © 2016 - 12
ARA Research
SOX Index Summary
 Eight “Up-Down” and 2 “Sideways” Cycles; Currently in Early Phase of a
“Down” or “Sideways” Cycle; Down ~10% From Previous Peak
 Peaked During “Internet” Bubble of 1999 & 2000; Still Trades at ~50% of
2000 Peak, Even Though Has Had a Steady Rise From 2008 Financial Crises
 Fairly Extreme Movements Either Up (>100%) or Down (> -75%) Over
Relatively Short Periods
 Median Up-Cycle Gain (123%) Was ~2X The Median Down-Cycle
 Median Up-Cycle Length (~20 Mths) Was ~2X Median Down- Cycle, So
Relative Slope (~6.5% Per Month) Was Same For Both Portions
 Setting Aside Two Neutral Cycles, Only One Cycle Was Less Than ±30%;
The Down-Cycle From June to Dec 2011 Which Only Dropped ~22%
 SOX Index Tends to Lead Semi Revenue By a Few Months on Down-Cycles,
But is Coincident With Semi Revenue Increases on Up-Cycles
 The Most Recent Cycle is an Exception Where Semi Revenue Declined Well
Before the SOX Index Started to Drop (Due to Heavy 2015 M&A ?)

13. Semiconductors
ARA (April’16)- © 2016 - 13
ARA Research
SOX Index:
U.S. Recessions
ARA ResearchARA Research

14. Semiconductors
ARA (April’16)- © 2016 - 14
ARA Research
SOX Index vs. U.S. Recession
NBER* Recessions
in Grey
SOX Index Has Exhibited Significant Drops Outside of Recession Periods
Through March 31, 2016
* National Bureau of Economic Research

15. Semiconductors
ARA (April’16)- © 2016 - 15
ARA Research
SOX Index Off-Peak Chart
NBER Recessions
in Grey
SOX “Off-Peak” Chart Since Index Inception Highlights 2000 Falloff
Through March 31, 2016

16. Semiconductors
ARA (April’16)- © 2016 - 16
ARA Research
NBER Recessions
in Grey
SOX Index Off-Peak Since 2001
SOX “Off-Peak” Chart Since 2001 Eliminates the Impact of the 2000 Run-
Up & More Clearly Shows Current Index Dynamics
Through March 31, 2016

17. Semiconductors
ARA (April’16)- © 2016 - 17
ARA Research
SOX vs. Recession Summary
 SOX Has Experienced Significant Drops Outside of Recession Boundaries
 8 Cycles with >30% Drop Identified Since Index Inception
 Index Period Encompassed 2 Recessions
 2001 Recession: The SOX Exhibited Behavior Specific to Dynamics of Its
Market Segment (Technology)
 ~ 1 Year Before Recession Start the SOX Had Major Drop; Also
Exhibited By Tech Heavy NASDAQ
 Precipitated by Telecom & Dot Com ‘Bubble’
 As Percentage of Peak, SOX Lost More Value Prior to Recession Than
After Start of Recession; Not Typical of Other Indices/Recessions
 2008 Recession: The SOX Behaved in a Manner Similar to Other Major US
Indices; i.e. If Total Drop From Previous Recent Peak = 100%:
 ~33% Drop Before Recession Start
 ~67% Drop After Recession Start
 Recovery Starts Well Before Recession End
 Given SOX’s High Correlation to Major US Indices (Pg. 20 & 21), It is Likely
to Exhibit Behavior More Like 2008 than 2001 in Next Recession

18. Semiconductors
ARA (April’16)- © 2016 - 18
ARA Research
SOX Index
Benchmarks
ARA ResearchARA Research

19. Semiconductors
ARA (April’16)- © 2016 - 19
ARA Research
Through March 31, 2016
SOX Index Behavior “Mimics” S&P 500 and NASDAQ – How Well?
SOX Index vs. S&P500 & NASDAQ

20. Semiconductors
ARA (April’16)- © 2016 - 20
ARA Research
SOX Correlation to NASDAQ
1994 - 2016 2001 - 2016 2006 - 2016
0.59 0.48 0.79
Regression Coefficient (R2)
During Past 10 Years SOX & NASDAQ Have Become Highly Correlated

21. Semiconductors
ARA (April’16)- © 2016 - 21
ARA Research
SOX Correlation to S&P500
Regression Coefficient (R2)
1994 - 2016 2001 - 2016 2006 - 2016
0.5 0.58 0.89
During Past 10 Years SOX & S&P500 Have Become Highly Correlated

22. Semiconductors
ARA (April’16)- © 2016 - 22
ARA Research
$1,000 Becomes*:
Benchmark Performance: B&H
End Mar'16
S&P $4,560
Russell $4,378
DJI $4,783
NASDAQ $6,578
SOX $5,690
* Since SOX Inception
Through March 31, 2016

23. Semiconductors
ARA (April’16)- © 2016 - 23
ARA Research
SOX Index Relative Performance
vs. NASDAQ: SOX Performance Generally Worse in any Given 5
Year Period; Worse Overall
vs. S&P500: SOX Performance Better in “Good” 5 Year Periods
& Worse in “Bad” 5 Year; Slightly Better Overall
Similar Performance For All 5 Indices in Last 5 Year Period
CAGR
CAGR S&P500 Dow R2000 NASDAQ SOX
1995 - 1999 25% 26% 14% 38% 36%
2000 - 2004 -3.5% 1% 5% -12% -11%
2005 - 2009 -1.2% 2.4% -0.2% 1.4% -3.0%
2010 - 2014 13% 14% 13% 16% 14%
1995 - 2016 7.2% 7.3% 7.2% 9.3% 7.5%
Note: Through End March’16

24. Semiconductors
ARA (April’16)- © 2016 - 24
ARA Research
SOX Index Relative Performance
vs. NASDAQ: SOX Annualized Volatility ~50% Higher,
Decreasing Modestly (From 1.9X to 1.4X) Over Time
vs. S&P500: SOX Annualized Volatility ~2x Higher,
Decreasing Significantly (From 2.5X to 1.6X) Over Time
Annualized Volatility
Volatility S&P500 Dow R2000 NASDAQ SOX
1995 - 1999 16% 16% 14% 21% 40%
2000 - 2004 20% 20% 23% 35% 57%
2005 - 2009 24% 22% 30% 25% 32%
2010 - 2014 16% 15% 22% 18% 25%
1995 - 2016 19% 18% 22% 25% 39%
Note: Through End March’16

25. Semiconductors
ARA (April’16)- © 2016 - 25
ARA Research
SOX Index Relative Performance
NASDAQ, S&P 500 and Dow Indices Historical Risk Adjusted
Return (CAGR/Volatility) All ~2X Better Than SOX
For the Most Recent 5 Years (Since March 2016) The Difference
in Risk Adjusted Return Has Narrowed Such That the NASDAQ,
S&P 500 and Dow Indices Are ‘Only’ 1.5 Better Than SOX
CAGR /Annualized Volatility
CAGR/Volatility S&P500 Dow R2000 NASDAQ SOX
1995 - 1999 1.6 1.7 1.0 1.8 0.9
2000 - 2004 -0.2 0.0 0.2 -0.3 -0.2
2005 - 2009 -0.1 0.1 0.0 0.1 -0.1
2010 - 2014 0.8 1.0 0.6 0.9 0.6
1995 - 2016 0.4 0.4 0.3 0.4 0.2

26. Semiconductors
ARA (April’16)- © 2016 - 26
ARA Research
Indices Comparison Summary
 Over The Past 10 Years The SOX Has Exhibited Relatively High Correlation
to the NASDAQ (R2 ~0.8) and S&P500 (R2 ~0.9); Prior to That Not So Much
 For The Period 1995 – March 2016, The NASDAQ, SOX, and S&P500 CAGR
was 9.3%, 7.5%, & 7.2% With a Volatility of 25%, 39%, & 19% Respectively
 SOX Relative Risk (CAGR/Volatility) Was Worse Than NASDAQ or S&P500
 Individual 5 Year Periods For Most Part Exhibit Similar Relative Results
 $1,000 Invested in Each of the 5 Indices Since May 1994 Grow to ~$6,600,
~$5,700, ~$4,400 to ~$4,800 (Excluding Dividends) March 2016 For
NASDAQ, SOX, DJI / Russell 2000/S&P500 Respectively
 Whereas The Four Benchmark Indices are Currently Above or Close to
Their All Time High, The SOX is at ~50% of It’s 2000 Peak
 If One Were Unlucky Enough to Have Invested at or Near The SOX Peak in
2000, They Would Still Have Lost ~50% of The Investment as of March 2016
 The SOX Has Exceeded Its Pre-2008 Financial Crises ‘Peak’, But It Took 6
Years to Recover


27. Semiconductors
ARA (April’16)- © 2016 - 27
ARA Research
SOX Index
Momentum Analysis
ARA ResearchARA Research

28. Semiconductors
ARA (April’16)- © 2016 - 28
ARA Research
SOX Index Momentum
 Objective:
 Determine if Simple Momentum Rules Can Be Utilized on the SOX Index to
Obtain a Better Return Than a “Buy & Hold” Strategy
 Two Distinct Momentum Rules Utilized
 First Momentum Rule (Momentum Always “On”):
 Conventional Use of Momentum
 Buy on Positive Momentum: “Current” Price > Lookback Period Price
 Sell on Negative Momentum: “Current” Price < Lookback Period Price
 Second Momentum Rule (Momentum “On” Only During Recession):
 Growth Trend Timing: http://www.philosophicaleconomics.com/2016/01/gtt/
 Use Conference Board Co-Incident Composite Indicator (or Your Favorite
Recession Indicator(s) ) to Determine Whether In or Out of Recession
 Outside Recession: Buy on Positive Momentum or Stay Invested (B&H)
 Inside Recession: Apply First Momentum Rule

29. Semiconductors
ARA (April’16)- © 2016 - 29
ARA Research
Momentum Calculations
 Daily and End of Month Market Close Calculations Utilized
 Lookback Periods:
 Absolute Performance: 3, 6, and 12 Month
 Absolute Performance With Non-Zero (2.5%) Cutoff: 6 Months
 Moving Average: 200 Day Simple Moving Average and Various Exponentially
Weighted Moving Averages
 Buy-Sell Decisions Made Once Per Mth; Last Trading Day of
the Mth
 Tax Scenarios (Deferred vs. Instant):
1) Taxed at End of Holding Period (Retirement Account)s; Also True for B&H
2) Taxed at 33% on a Trade Gain, No Tax Benefit on Trade Loss
 Fees/Spread: Low Cost ($10) Trades, Spread Not Taken Into
Account
 Invested Return and Maximum Draw-Down Calculated

30. Semiconductors
ARA (April’16)- © 2016 - 30
ARA Research
Momentum Summary: 1st Rule
 A Momentum-Based Trading Rule Can Yield Better Results Than B&H
 Lookback Period Matters – A Lot: Only 200 Day SMA and 3 Mth Lookbacks
Provided Greater Returns Than B&H in a Taxed Account
 Taxes Matter: In a Deferred Tax Account Momentum-Based Trading Yields
Better Results Than B&H in All Cases Except for 12 Mth Lookback
 No Momentum Rule Will Outperform B&H All of The Time; There Can be
Significant Periods (Years) of Underperformance
 3 Month Lookback Period Gave Best Overall Performance Over 20 Yr
Period, But in a Taxed Account Underperformed B&H for First 14 Years
 200 Day Simple Moving Avg Outperformed B&H Through 2013, But Has
Underperformed Since & is Now ~ Break-even in a Taxed Account
B&H Taxed No Tax Taxed No Tax Taxed No Tax Taxed No Tax Taxed No Tax
$1,000 Becomes $4,142 $5,103 $10,147 $2,650 $4,289 $1,860 $2,279 $4,276 $6,877 $3,685 $5,611
$ Trades (B&S) n/a 58 58 44 44 26 26 38 38 42 42
Avg Trades/Year n/a 2.9 2.9 2.2 2.2 1.3 1.3 1.9 1.9 2.1 2
Max Draw Down 73% 60% 50% 57% 44% 65% 60% 50% 42% 57% 44%
Median Draw Down 52% 37% 29% 42% 38% 39% 39% 35% 30% 41% 36%
3 Mth Lookback 6 Mth Lookback 12 Mth Lookback 200 Day SMA 6M LB / 2.5% CritSOX Results Through
March 31, 2016

31. Semiconductors
ARA (April’16)- © 2016 - 31
ARA Research
SOX B&H vs. Mtm 3 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4,142 $5,103 $10,147
$ Trades (B&S) n/a 58 58
Avg Trades/Year n/a 2.9 2.9
Max Draw Down 73% 60% 50%
Median Draw Down 52% 37% 29%
3 Mth Lookback
Through March 31, 2016

32. Semiconductors
ARA (April’16)- © 2016 - 32
ARA Research
SOX B&H vs. Mtm 6 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4,142 $2,650 $4,289
$ Trades (B&S) n/a 44 44
Avg Trades/Year n/a 2.2 2.2
Max Draw Down 73% 57% 44%
Median Draw Down 52% 42% 38%
6 Mth Lookback
Through March 31, 2016

33. Semiconductors
ARA (April’16)- © 2016 - 33
ARA Research
SOX B&H vs. Mtm 12 Mth Lookback
B&H Taxed No Tax
$1,000 Becomes $4,142 $1,860 $2,279
$ Trades (B&S) n/a 26 26
Avg Trades/Year n/a 1.3 1.3
Max Draw Down 73% 65% 60%
Median Draw Down 52% 39% 39%
12 Mth Lookback
Through March 31, 2016

34. Semiconductors
ARA (April’16)- © 2016 - 34
ARA Research
SOX Index & 200 Day SMA
Through March 31, 2016

35. Semiconductors
ARA (April’16)- © 2016 - 35
ARA Research
B&H vs. 200 Day SMA Lookback
Through March 31, 2016
B&H Taxed No Tax
$1,000 Becomes $4,142 $4,276 $6,877
$ Trades (B&S) n/a 38 38
Avg Trades/Year n/a 1.9 1.9
Max Draw Down 73% 50% 42%
Median Draw Down 52% 35% 30%
200 Day SMA

36. Semiconductors
ARA (April’16)- © 2016 - 36
ARA Research
Impact of Non-Zero Threshold
Criteria: 6 Mth Look Price ≥ 2.5% Higher
Than Current Price to “Buy” Through March 31, 2016
B&H Taxed No Tax
$1,000 Becomes $4,142 $3,685 $5,611
$ Trades (B&S) n/a 42 42
Avg Trades/Year n/a 2.1 2.1
Max Draw Down 73% 57% 44%
Median Draw Down 52% 41% 36%
6 Mth LB / 2.5% Criteria

37. Semiconductors
ARA (April’16)- © 2016 - 37
ARA Research
A Closer Look at 3 Mth Lookback
Through March 31, 2016

38. Semiconductors
ARA (April’16)- © 2016 - 38
ARA Research
Where Are We So Far?
 Compared to “Buy & Hold” Investing No Really Good
Alternatives Using Simple Momentum Rules on SOX
 Results Are Highly Dependent on Lookback Period; Only
One of The Four Lookback Periods Beat B&H in a Taxed
Account With Any Degree of Margin
 The Best Performing Lookback Period (3 Mths), While
Producing a Good End Result, Under-Performed “Buy &
Hold” For The First 14 Years of The Index
Is There a Way To Adjust Momentum in a Simple
Manner That Significantly Improves The Results?

39. Semiconductors
ARA (April’16)- © 2016 - 39
ARA Research
Momentum Summary: 2nd Rule
 Applying Recession Filter (Use Mtm Rule Only Within Recession Limits)
Significantly Improves Performance Over Using Mtm Rule at All Times
 Required Very Few (Only 6 Trades; 3 Buy-Sells) Trades Over 20+ Years
 Does Not Provide as Good Overall Return as Mtm 3 Mth Lookback, But Does
Outperform B&H in Any Given Month For Almost The Entire 20+ Year Period
 As Noted Previously The Mtm 3 Mth Lookback Method Underperformed B&H
For Most of the First ~14 Years of the SOX (Pg. 37)
 Much More Likely to Stay With an Investment Strategy When It Out-Performs
Alternative Strategies in Most Years
B&H Taxed No Tax Taxed No Tax Taxed No Tax
$1,000 Becomes $4,142 $5,103 $10,147 $4,276 $6,877 $6,917 $8,590
$ Trades (B&S) n/a 58 58 38 38 6 6
Avg Trades/Year n/a 2.9 2.9 1.9 1.9 0.3 0.3
Max Draw Down 73% 60% 50% 50% 42% 66% 66%
Median Draw Down 52% 37% 29% 35% 30% 52% 42%
SMA - Recession3 Mth Lookback 200 Day SMASOX Results Through
March 31, 2016

40. Semiconductors
ARA (April’16)- © 2016 - 40
ARA Research
Momentum Rule Only in Recession
Criteria: 200 Day SMA Applied Only During Recessionary Periods
B&H Taxed No Tax
$1,000 Becomes $4,142 $6,917 $8,590
$ Trades (B&S) n/a 6 6
Avg Trades/Year n/a 0.3 0.3
Max Draw Down 73% 66% 66%
Median Draw Down 52% 52% 42%
200 Day SMA - RecessionSOX Results Through
March 31, 2016

41. Semiconductors
ARA (April’16)- © 2016 - 41
ARA Research
Momentum: Always vs. Recession
Criteria: 200 Day SMA – Res = Momentum Rule Applied Only During Recessions
200 Day SMA – Momentum Rule Applied Entire Time
B&H Always Recessions
$1,000 Becomes $4,142 $4,276 $6,917
$ Trades (B&S) n/a 38 6
Avg Trades/Year n/a 1.9 0.3
Max Draw Down 73% 50% 66%
Median Draw Down 52% 35% 52%
200 Day SMA
SOX Results Through
March 31, 2016

42. Semiconductors
ARA (April’16)- © 2016 - 42
ARA Research
Appendix:
Background Information
ARA ResearchARA Research

43. Semiconductors
ARA (April’16)- © 2016 - 43
ARA Research
WW Semiconductor Sales
Growth Rate Drop From Historical 15% CAGR to 6% Since 2000
Given Industry Size & Penetration Don’t Expect Return to 15% CAGR Unless
Global GDP Exceeds 4 – 4.5% Consistently
“Semiconductor Industry Primer 2015”
D. Wong (Wells Fargo) Oct’15

44. Semiconductors
ARA (April’16)- © 2016 - 44
ARA Research
NASDAQ Correlation to S&P500
Regression Coefficient (R2)
1994 - 2016 2001 - 2016 2006 - 2016
0.90 0.94 0.93

45. Semiconductors
ARA (April’16)- © 2016 - 45
ARA Research
SOX Index Summary
 PHLX Semiconductor Sector Index is a Modified Capitalization Weighted
Index Made Up of the Major Companies in the Semiconductor Sector
 Two Versions
 Price Return Index (SOX): Calculated Without Regard To Cash Dividends on Index
Securities (Initiated Dec 1st 1993 at Base Value = $100)
 Total Return Index (XSOX): Reinvests Cash Dividends on Ex-Date.; Synchronized to
Value of The Price Return Index at The Close on Dec 22, 2009
 Both Indexes Reflect Extraordinary Cash Distributions
 Index Eligibility (Main Points)
 Be Listed on NASDAQ Stock Market or New York Stock Exchange
 Have Minimum Market Capitalization of $100 Million
 Have Traded at Least 1.5 Million Shares in Each of Previous Six Months
 Index Evaluation
 Index Securities Evaluated Every Sept; Additions/Deletions Effective 3rd Friday of Sept
 Securities Meeting Eligibility Criteria as of End of July Ranked By Market Capitalization
 Top 30 Securities By Market Capitalization Included in Index

46. Semiconductors
ARA (April’16)- © 2016 - 46
ARA Research
SOX Index Calculation
 Value of Index Equals Aggregate Value of Index Share Weights
Step 1) Calculate Total Market Value of Index = Sum of Market Value of Each Index Component = The
Last Sale Price Multiplied By Number of Shares Outstanding
Step 2) Calculate Weight of Each Index Component = Its Market Value Divided By Total Market Value
of Index
Step 3) Employ Capitalization Weighting Adjustment/Modification Algorithm to Limit Contribution of
Largest Market Cap Companies to 8% or Less (See Rebalancing Section)
Step 4) Calculate Aggregate “Modified” Capitalization Weighted Market Value = Sum of Each Index
Component's Weight and Last-sale Price
Step 5) Divide Aggregate Weighted Market Value By Divisor, Which Scales Aggregate Value to Lower
Value More Suitable For Reporting
 Index Balancing
 Index Employs a Modified Market Capitalization Weighting Methodology
 Each Qtr, Index Rebalanced Such That Max Weight of Any Security Does Not Exceed 8% and No
More Than 5 Securities Are at That Cap
 Excess Weight of Any Capped Security is Distributed Proportionally Across Remaining Index
Securities
 If After Redistribution, Any of The 5 Highest Ranked Index Securities are Below 8%, These
Securities are Not Capped
 Next, Any Remaining Index Securities in Excess of 4% are Capped at 4% and The Excess Weight
is Redistributed Proportionally Across Remaining Index Securities
 Process is Repeated, As Necessary, To Derive The Final Weights

47. Semiconductors
ARA (April’16)- © 2016 - 47
ARA Research
SOX Index Companies 2013 - 15
Ticker Name
Weight
(%)
Index
MMC
($B)
Market
Cap
($B)
Ticker Name
Weight
(%)
Index
MMC
($B)
Ticker Name
Weight
(%)
Index
MMC
($B)
ADI Analog Devices, Inc. 4.1 $18.4 $20.0 ADI Analog Devices, Inc. 3.9 $19.8 ADI Analog Devices, Inc. 3.8 $9
AMAT Applied Materials, Inc. 3.7 $16.3 $19.7 ALTR Altera (Intel) 2.7 $13.5 ALTR Altera (Intel) 3.3 $7
ARMH ARM Holdings plc 1.8 $8.0 $23.1 AMAT Applied Materials, Inc. 6.2 $31.4 AMAT Applied Materials, Inc. 6.3 $14
ASML ASML Holding NV 1.8 $8.0 $40.3 ARMH ARM Holdings plc 1.4 $6.9 AMD Advanced Micro Devices 0.7 $2
ATML Atmel Corporation 1.0 $4.5 $3.6 ASML ASML Holding NV 2.0 $10.3 ARMH ARM Holdings plc 1.8 $4
AVGO Avago Technologies 7.2 $32.3 $35.7 ATML Atmel Corporation 0.8 $4.0 ASML ASML Holding NV 3.0 $7
CAVM Cavium, Inc. 1.1 $5.0 $4.0 AVGO Avago Technologies 4.2 $21.6 ATML Atmel Corporation 1.0 $2
CY Cypress Semiconductor 0.9 $4.1 $3.4 BRCM Broadcom (Avago) 4.3 $21.8 AVGO Avago Technologies 3.4 $8
INFN Infinera Corporation 0.7 $3.3 $2.4 CREE Cree 0.9 $4.8 BRCM Broadcom (Avago) 3.8 $9
INTC Intel Corporation 8.7 $39.1 $166.0 FSL Freescale (NXP) 1.5 $7.7 CREE Cree 2.2 $5
KLAC KLA-Tencor Corporation 2.9 $12.9 $10.2 INTC Intel Corporation 7.8 $40.0 FSL Freescale (NXP) 1.2 $3
LLTC Linear Technology Corp 3.1 $13.9 $11.3 KLAC KLA-Tencor Corporation 3.3 $16.7 INTC Intel Corporation 8.0 $18
LRCX Lam Research Corporation 3.2 $14.5 $11.8 LLTC Linear Technology Corp 2.6 $13.0 KLAC KLA-Tencor Corporation 3.3 $8
MCHP Microchip Technology Inc. 2.9 $13.0 $10.4 LRCX Lam Research Corporation 3.1 $16.1 LLTC Linear Technology Corp 2.9 $7
MRVL Marvell Technology Group 1.3 $6.0 $5.0 MCHP Microchip Technology Inc. 2.2 $11.0 LRCX Lam Research Corporation 2.7 $6
MSCC Microsemi Corporation 1.0 $4.3 $3.5 MRVL Marvell Technology Group 1.7 $8.7 LSI LSI CORP 1.4 $3
MU Micron Technology, Inc. 3.7 $16.5 $18.6 MU Micron Technology, Inc. 8.1 $41.4 MCHP Microchip Technology Inc. 2.6 $6
MXIM Maxim Integrated Products 3.1 $14.1 $10.8 MXIM Maxim Integrated Products 2.1 $10.6 MRVL Marvell Technology Group 1.8 $4
NVDA NVIDIA Corporation 4.3 $19.4 $15.4 NVDA NVIDIA Corporation 2.6 $13.5 MU Micron Technology, Inc. 4.7 $11
NXPI NXP Semiconductors NV 4.2 $18.8 $22.3 NXPI NXP Semiconductors NV 4.0 $20.6 MXIM Maxim Integrated Products 2.6 $6
ON ON Semiconductor 1.3 $5.7 $4.7 ON ON Semiconductor 0.9 $4.7 NVDA NVIDIA Corporation 2.7 $6
QCOM Qualcomm Incorporated 7.7 $34.7 $95.4 QCOM Qualcomm Incorporated 8.3 $42.3 NXPI NXP Semiconductors NV 3.2 $7
QRVO Qorvo, Inc. 2.1 $9.4 $7.7 RFMD RF Micro Devices (Quorvo) 0.9 $4.8 ON ON Semiconductor 1.0 $2
SNDK SanDisk Corp. 4.5 $19.9 $16.0 SNDK SanDisk Corp. 3.9 $19.7 QCOM Qualcomm Incorporated 7.6 $17
SUNE SunEdison, Inc. 0.7 $3.1 $2.5 SUNE SunEdison, Inc. 1.3 $6.7 SNDK SanDisk Corp. 4.6 $10
SWKS Skyworks Solutions Inc. 3.4 $15.2 $15.8 SWKS Skyworks Solutions Inc. 2.8 $14.0 SWKS Skyworks Solutions Inc. 1.5 $3
TER Teradyne Inc. 1.1 $5.0 $4.0 TER Teradyne Inc. 0.9 $4.8 TER Teradyne Inc. 1.0 $2
TSM Taiwan Semiconductor Mfg 6.0 $26.7 $116.5 TSM Taiwan Semiconductor Mfg 4.2 $21.6 TSM Taiwan Semiconductor Mfg 5.9 $13
TXN Texas Instruments Inc. 8.8 $39.4 $60.5 TXN Texas Instruments Inc. 8.3 $42.3 TXN Texas Instruments Inc. 8.0 $18
XLNX Xilinx Inc. 3.5 $15.6 $48.7 XLNX Xilinx Inc. 3.0 $15.2 XLNX Xilinx Inc. 3.7 $8
Market Close Oct'22 2015 1.0 $447 $809 1.0 $509 1.0 $227
October 2015 October 2014 October 2013

48. Semiconductors
ARA (April’16)- © 2016 - 48
ARA Research
SOX Index Sept vs. Oct 2010
 SOX Index Transitioned to
Modified Market Cap Algorithm
and 30 Companies Oct 2010
 Prior to That SOX Index Carrier
16 – 21 Companies, While the
iShares ETF (SOXX) Carried 52
Companies
 Since Oct 2010 Both The SOX
and SOXX Carried the Identical
30 Companies
 Blue = Companies Added
Oct’2010
 Weightings Shown are for SOXX
Ticker Name
Weight
(%)
Index
MMC
($B)
Ticker Name
ALTR Altera (Intel) 4.18 $7.4 ALTR Altera (Intel)
AMAT Applied Materials, Inc. 7.86 $13.9 AMAT Applied Materials, Inc.
AMD Advanced Micro Devices 3.25 $5.8 AMD Advanced Micro Devices
ATHR Atheros (Qcom) 1.45 $2.6 ATHR Atheros (Qcom)
AVGO Avago Technologies 3.88 $6.9 BRCM Broadcom (Avago)
BRCM Broadcom (Avago) 8.98 $15.9 CREE Cree
CREE Cree 3.16 $5.6 HITT Hittite Microwave (ADI)
CRUS Cirrus Logic 0.57 $1.0 INTC Intel Corp
HITT Hittite Microwave (ADI) 1.04 $1.8 KLAC KLA-Tencor Corp
INTC Intel Corp 7.48 $13.2 LLTC Linear Technology Corp
KLAC KLA-Tencor Corp 3.94 $7.0 LRCX Lam Research Corp
LLTC Linear Technology Corp 3.72 $6.6 MU Micron Technology
LRCX Lam Research Corp 3.74 $6.6 NSM National Semi (TI)
MKSI MKS Instruments 0.68 $1.2 NVLS Novellus Systems (Lam)
MRVL Marvell Technology Group 6.85 $12.1 SNDK SanDisk Corp.
MU Micron Technology, Inc. 4.22 $7.5 STM ST Microelectronics
NETL Netlogic Micro (BCOM) 1.26 $2.2 TER Teradyne
NSM National Semi (TI) 2.16 $3.8 TSM Taiwan Semiconductor Mfg
NVDA NVIDIA Corporation 4.26 $7.5 TXN Texas Instruments Inc.
NVLS Novellus Systems (Lam) 1.77 $3.1 WFR MEMC Electronics
POWI Power Integrations 0.63 $1.1 XLNX Xilinx Inc.
RBCN Rubicon Technology 0.35 $0.6
SNDK SanDisk Corp. 3.73 $6.6
STM ST Microelectronics 0.46 $0.8
TER Teradyne Inc. 1.34 $2.4
TSM Taiwan Semiconductor Mfg 3.83 $6.8
TXN Texas Instruments Inc. 8.48 $15.0
VECO Veeco Instruments 1.13 $2.0
WFR MEMC Electronics 1.92 $3.4
XLNX Xilinx Inc. 3.67 $6.5
100% $177
September 2010October 2010

49. Semiconductors
ARA (April’16)- © 2016 - 49
ARA Research
SOX Index Cycles Table
Median Min Max
Up 123% 50% 496%
Down -57% -69% -22%
Neutral 3% -17% -4%
Median Min Max
Up 19 6 30
Down 10 7 17
Neutral 14 11 17
Cycle Change Summary Cycle Length Summary
Cycle
Start
Cycle
End
Months
in Cycle
Cycle
Change
Cycle
Start
Cycle
End
Months
in Cycle
Cycle
Change
May-94 Sep-95 17 153% Feb-04 Aug-04 7 -65%
Oct-95 Jul-96 10 -52% Sep-05 Apr-06 20 50%
Aug-96 Sep-97 14 171% May-06 Sep-07 17 -4%
Oct-97 Aug-98 11 -50% Oct-07 Feb-09 17 -63%
Sep-98 Aug-00 24 496% Mar-09 May-11 27 133%
Sep-00 Sep-01 13 -69% Jun-11 Dec-11 7 -22%
Oct-01 Mar-02 6 72% Jan-12 Nov-12 11 9%
Apr-02 Jan-03 10 -57% Dec-12 May-15 30 93%
Feb-03 Jan-04 12 113% Jun-15 Mar-16 5 -9%

50. Semiconductors
ARA (April’16)- © 2016 - 50
ARA Research
Index Volatility
 Basic Definition:
 Standard Deviation of Historical Returns
 Basically a “Dispersion” Measure; Greater Dispersion (Volatility) Implies Greater Risk
 Upside & Downside Price Movements Are Equally Considered in the Volatility
Calculation; The Sortino Ratio Attempts to Capture Just Downside Volatility
 Calculation
Step 1) Calculate Daily Periodic Stock Return (Ri) = (Pi – Pi-1)/Pi ; Where Pi is Current
Day’s Closing Price and Pi-1 is Closing Price on Previous Day
 More Often Ri = Ln(Pi/Pi-1) is Used as it Better Represents a Continuously
Compounded Return; Approximately The Same For Most Short Intervals
 This was the Method Employed in This Study
Step 2) Decide on Time Period; Volatility for Both the Full 20 Year (1994 – 2014) as Well
as 5 Year Intervals Was Calculated for The 3 Indices Examined in This Study
Step 3) Calculate Daily Sample Variance = [ Sum(Pi-1 – Avg P)2 ] / (m-1); Where ‘m’ =
Number of Sample Data Points Over Which The Sum is Performed
Step 4) Calculate Annualized Sample Volatility = Sqrt (Sample Variance) x Sqrt (250);
250 Being The Number of Trading Days in a Typical Year
 Note: To Calculate Annualized Weekly or Monthly Volatility Multiply The
Corresponding Weekly or Monthly Volatility By Sqrt(52) or Sqrt(12) Respectively;
The Calculated Volatility Will Be Slightly Different in Each Case