Chip ETFs Tumble As Trade Fears Intensify: Time To Buy?

Semiconductors stocks took a huge beating in Monday’s session following reports that the Trump administration is seeking to curb many Chinese companies from investing in U.S. technology firms and block additional technology exports to that country.

The Treasury Department is working on the rules to block companies with at least 25% Chinese ownership from buying companies involved in "industrially significant technology.” The measures are expected to be announced by the end of this week and are intended to counter Beijing's Made in China 2025 strategic plan. Under this plan, China wants to become a global leader in 10 broad areas of technology, including information technology, aerospace, electric vehicles and biotechnology (read: Inverse ETFs Surge as Trade War Fears Escalate).

The move will escalate tensions between Washington and Beijing that have been on a brutal trade fight. The Washington has already threatened an import tariff on $450 billion worth of Chinese goods, of which tariffs on $34 billion worth of Chinese goods are due to take effect on Jul 6. In response, Beijing has also announced an import tariff of “the same scale and strength” with penalties on American goods worth $34 billion to come into effect on Jul 6.

Concerns over Chinese investment were raised at the time when its investment in the United States is already declining. It plunged more than 90% in the first five months of 2018 compared with the same period a year earlier, per a CNN report.

Market Impact

Chip stocks were the hardest hit by escalating trade tensions with Beijing. Per Morgan Stanley (NYSE:MS) equity strategists, “semiconductor and semiconductor equipment companies have the highest revenue exposure to China at 52% (read: 5 Sector ETFs Most Exposed to Trade Tensions).”

As such, the Philadelphia Semiconductor Index dropped 3.1% at the close on Monday. Micron Technology (NASDAQ:MU) stole the show, plunging 6.9%. This was followed by declines of 5.3% for Marvell Technology (NASDAQ:MRVL) , 5% for Smart Global (NASDAQ:SGH) , 4.7% for Nvidia (NASDAQ:NVDA) , and 4.4% for Advanced Micro Devices (NASDAQ:AMD) . Other chip stocks like Intel (NASDAQ:INTC) and Microchip Technology (NASDAQ:MCHP) were also down more than 3% on the day.

The terrible trading in the stock world also sent the semiconductor ETFs space into deep red on the day. In particular,VanEck Vectors Semiconductor ETFSMH, Invesco Dynamic Semiconductors ETF (TO:PSI) , iShares PHLX Semiconductor ETF SOXX) and SPDR S&P Semiconductor (NYSE:XSD) ETF XSD tumbled at least 3% each at the close. Below we profile these ETFs and discuss some of the specifics behind their recent slump:

SMH

This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. It has moderated concentration across components with none accounting for more than 8.35% of assets. The product has managed assets worth $1.2 billion and charges 35 bps in annual fees and expenses (read: Why This Semiconductor ETF Lost Almost Half of its Assets).

PSI

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in the basket with none making up for more than 5.1% of assets. The product has so far amassed $343.9 million in its asset base while charges a bit higher fee of 63 bps per year from investors.

SOXX

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 firms with none accounting for more than 8.3% share. It has amassed $1.6 billion in its asset base and charges 48 bps in fees a year.

XSD

This fund provides equal-weight exposure to 35 firms by tracking the S&P Semiconductor Select Industry Index. The fund has accumulated $331.8 million in AUM and charges 35 bps in fees per year.

Long-Term Outlook

Despite the trade tensions, the outlook for the sector is solid. After witnessing highest growth in 14 years, the global semiconductor industry is on track to grow 12.4% this year, according to the World Semiconductor Trade Statistics (WSTS).

Semiconductors are the most important drivers of overall technology growth as these are used in cars, electronic gadgets, planes and weapons. Robust demand for memory chips and other semiconductor products owing to the rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, and other advanced information technologies will fuel huge growth in the space.

Additionally, the deployment of 5G (fifth-generation) technology — the next wireless revolution — will likely create further opportunities. The waves of mergers and acquisitions will also provide further impetus to the space. Trump’s tax reform is another tailwind. Big semiconductor companies hoard huge cash overseas and are poised to benefit the most from the reduced tax rates (read: 5 Reasons to Bet on the Rebound in Semiconductor ETFs).

Moreover, the above-mentioned products have a solid Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting that these will likely outperform the broader market for months.

Given the solid long-term outlook but trade concerns, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to see this recent slump as a buying opportunity, provided they have the patience for extreme volatility.

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