At a time when investors are eyeing a truce between the strongest economies in the upcoming G-20 summit meeting, Trump administration has dealt a fresh blow to Chinese tech firms. The U.S. Commerce Department has added four Chinese companies and one Chinese institute to the Entity List.
One of the five entities that have been targeted this time is Sugon, China’s prominent supercomputer developer. A few subsidiaries like Higon, Chengdu Haiguang Integrated Circuit and Chengdu Haiguang Microelectronics Technology, which design and develop microchips, have also been banned along with the Wuxi Jiangnan Institute of Computing Technology.
As these companies make their way into the Entity List, U.S. suppliers will be mandated to apply for licenses to provide components to these Chinese entities. These licenses are likely to be subject to strict U.S. export control regulations, and companies will need to justify that the transfer of such items will not jeopardize national security, restricting access to them.
We would like to add that this is not the first time that the United States has used this card in the trade war. On May 15, Trump signed an executive order to declare national emergency. Post the order, the U.S. Department of Commerce announced the addition of Huawei Technologies and its affiliates to the Bureau of Industry and Security Entity List (read: Will Semiconductor ETFs Survive the Huawei Ban?).
Why the Ban?
Per the U.S. Commerce Department, the newly-banned Chinese entities are leading developers of China’s high performance computing. Some of these high performance computing are used in military applications like simulating nuclear explosions.The department has justified the move by stating that the activities of these entities “pose a significant risk of being or becoming involved in activities contrary to the national security and foreign policy interests of the United States.”
It is worth noting that the United States had placed a Chinese organization engaged in supercomputer development with military uses on the Entity List. In this regard, China's National University of Defense Technology was added to the Entity List in 2015.
Interestingly, Sugon and Wuxi dominate China's exascale high-performance computing development to assist military modernization. Paul Triolo, a technology analyst with the Eurasia Group, said that “the technology involved supports such military-related tasks as running nuclear simulations, calculating missile trajectories and hypersonic algorithms.”
Moreover, over the recent years, U.S. and Chinese companies have been vying to reach the top as makers of the world's fastest supercomputers. In this regard, Sugon ranked 63 of the top 500 recently. The company has also been developing a next-generation processor.
Meanwhile, Higan develops integrated circuits, electronic information systems, software and computer system integration, while the Chengdu entities design X86 architecture chips and make integrated circuits.
Speculations are rife that the ban aims at limiting China’s ability to dominate the next-generation supercomputing space.
Will the Ban Wreak Havoc on U.S. Chip-Making Industry?
Analysts believe that the ban is largely going to impact companies within the semiconductor and software industries. Sugon strongly relies on U.S. suppliers, including chipmakers like Intel (NASDAQ:INTC), Nvidia and Advanced Micro Devices (NASDAQ:AMD), for chips which make an integral part of supercomputers. Per CNBC, shares of U.S. semiconductors like Advanced Micro Devices declined more than 3%, while Xilinx (NASDAQ:XLNX) and Nvidia lost 2.2% and 1.5%, respectively, after the ban announcement on Jun 21. Also, the PHLX Semiconductor Index lost about 0.7% on the same day.
Semiconductor ETFs in Focus
Against this backdrop, let’s take a look at some of the semiconductor ETFs facing the trade war heat. The iShares PHLX Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH, Direxion Daily Semiconductors Bull 3x Shares SOXL and the ProShares Ultra Semiconductors USD lost around 0.6%, 0.5%, 2.1% and 0.9%, respectively, on Jun 21.
SOXX
This ETF offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. The fund has amassed $1.42 billion in its asset base and charges a fee of 47 bps a year. It has a Zacks ETF Rank of 2 (Buy) with a High risk outlook (read: How China Could Retaliate Huawei Ban & Its Impact on ETFs).
SMH
This ETF has AUM of $1.22 billion. The fund provides exposure to 25 global securities by tracking the MVIS US Listed Semiconductor 25 Index. The fund charges an expense ratio of 0.35%. It has a Zacks ETF Rank #2 with a High risk outlook (read: Dividend and Semiconductor: 2 ETFs to Watch on Outsized Volume).
SOXL
This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. The fund holds 31 holdings in its basket. It has amassed about $652.1 million in its asset base while charging 99 bps in fees per year. It has a High risk outlook (read: Bulls Roar Again in June: Leveraged ETFs in Focus).
USD
This product seeks two times the daily performance of the Dow Jones U.S. Semiconductors Index, charging investors 95 bps in annual fees. The fund holds 32 holdings in its basket. It has accumulated $45.5 million in its asset base and has a High risk outlook (read: 4 ETFs to Invest in Soaring Semiconductor Stocks).
Caveat
The Trump administration is keeping investors perplexed. On one hand, it postponed a provocative speech by Vice President Mike Pence where he was likely to criticize China’s communist regime. On the other hand, the Trump administration has imposed the ban. Commenting on the move, William Reinsch, a former United States trade official and now a senior adviser at the Center for Strategic and International Studies, said “it’s ill timed. It clearly will be received negatively by the Chinese.”
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Direxion Daily Semiconductor Bull 3X Shares (SOXL): ETF Research Reports
iShares PHLX Semiconductor ETF (SOXX): ETF Research Reports
VanEck Vectors Semiconductor ETF (SMH): ETF Research Reports
ProShares Ultra Semiconductors (USD): ETF Research Reports
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