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Chip Shortages: ETF Winners and Losers

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The COVID-19 pandemic and the resultant work-learn-shop-from-home culture boosted the need for the already in-vogue digitization, accelerating the demand for various products and devices dependent on chips for their functioning. Demand for PCs, smart phones, gaming hardware and consoles increased.

Then there is demand rooting from the electric vehicle and telecom industry. The automotive sector has specifically advanced to include more electronic components in vehicles that rely on chips.

Robust recovery in smartphone sales is spurring demand for semiconductors. The global smartphone market grew 19% year over year in the second quarter. According to a forecast by Gartner, worldwide sales of smartphones will likely increase 11.4% year on year to 1.5 billion units in 2021. 5G Smartphones are likely to make up about 35% of total smartphone sales.

No wonder, the industry is currently facing an acute shortage of chips. The chip crisis appears to be like the oil shortage of the 1970s, per a barrons’ article. The delivery time has increased to more than 20 weeks, per Susquehanna Financial Group data in the same article.

Roughly 80% of all the chips in the world are made in Northeast Asia. With local governments around the globe realizing the depth of the crisis, efforts for local manufacturing have increased. President Joe Biden launched a plan for $50 billion in chip research earlier this year. But these are time-taking processes (read: Semiconductor ETFs A Great Bet Now: Here's Why).

Against this backdrop, below we highlight a few ETF areas that could gain/lose against this backdrop.

Winners

Semiconductor 

No wonder,VanEck Vectors Semiconductor ETF (SMH - Free Report) is up 13.7% versus 4.8% gains in the S&P 500 in the past six months. Even after such a rally, several semiconductor ETFs are cheaper than the Nasdaq 100 ETF Invesco QQQ (QQQ - Free Report) which has a P/E of 33.92X and the valuation of SMH is almost on par with QQQ.

Investors can play SPDR S&P Semiconductor ETF (XSD - Free Report) , Invesco Dynamic Semiconductors ETF (PSI - Free Report) and First Trust Nasdaq Semiconductor ETF (FTXL). Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM) are some of the stocks that are likely to be the beneficiaries of the trend.

Losers

Automotive

Auto bigwigs like Ford (F - Free Report) , Nissan (NSANY), Toyota (TM) and many more are facing production constraints amid shortage of chips. Further production cuts were announced by Toyota lately. Hence, First Trust NASDAQ Global Auto Index Fund (CARZ - Free Report) could be in a difficult spot in the coming days.

Consumers

The barrons.com article noted that low new- and used-car inventories have raised pricing and led to rising inflation. Used-car prices increased about 20% in the first half of 2021, while new-car prices rose about 3%. The spike in used-car prices has begun to cool down, but new-car price gains have been taking pace, rising about 7% year over year in July. This is likely to put pressure on consumers’ pockets. Consumer Discretionary Select Sector SPDR Fund (XLY - Free Report) thus may come under pressure.