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Semiconductor ETFs Tumble: What Lies Ahead?

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The semiconductor space saw brutal trading on Aug 9, after another chipmaker warned of slowing demand, sparking concerns that the industry might be heading into the worst downturn in at least a decade. Excessive valuation, excessive inventory build, and recession fears continued to weigh on the chip stocks.

As such, semiconductor ETFs like Invesco Dynamic Semiconductors ETF (PSI - Free Report) , First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) , iShares Semiconductor ETF (SOXX - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ - Free Report) and SPDR S&P Semiconductor ETF (XSD - Free Report) fell nearly 5% each on the day.

What Happened?

Memory-chip maker Micron Technology (MU - Free Report) became the latest chipmaker to forecast weakening revenues. The company expects sales in the current quarter to be at the low end or below its target range. The move follows a similar announcement made by Nvidia (NVDA - Free Report) last week when the graphics chipmaker slashed its revenue guidance for the fiscal second quarter on weak gaming-chip sales (read: Nvidia Tumbles on Fiscal Q2 Revenue Warnings: ETFs in Focus).

Intel Corp. (INTC - Free Report) , Qualcomm (QCOM - Free Report) and Sony Group also forecast weak sales on demand concerns for personal computers and phones.

The industry is currently facing a slowdown in demand for computer chips amid the PC market slump and many companies have boosted their inventories in response to supply-chain issues and labor shortages. Now, with demand slowing, companies may be forced to slash prices to get rid of those chips.

One analyst at Citigroup expects that semi stocks will fall by at least another 15% over the course of the year, as Wall Street analysts lowered their forecasts for profits during the earnings season.

Invesco Dynamic Semiconductors ETF (PSI - Free Report)

Invesco Dynamic Semiconductors ETF tracks the Dynamic Semiconductor Intellidex Index, holding 32 securities in its basket, with each making up less than 5.4% share.

Invesco Dynamic Semiconductors ETF has AUM of $614.5 million and sees a moderate average daily volume of 27,000 shares. The expense ratio is 0.56%.

First Trust Nasdaq Semiconductor ETF (FTXL - Free Report)

First Trust Nasdaq Semiconductor ETF offers exposure to the most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. FTXL holds 30 stocks in its basket, with none making up for more than 9% share.

First Trust Nasdaq Semiconductor ETF has accumulated $88.1 million in AUM. The average trading volume is light at around 11,000 shares and the expense ratio is 0.60%.

iShares Semiconductor ETF (SOXX - Free Report)

iShares Semiconductor ETF follows the ICE Semiconductor Index and offers exposure to U.S. companies that design, manufacture and distribute semiconductors. It holds 30 securities in its basket, with each making up for less than 8% of assets and charging a fee of 40 bps a year from investors (read: Intel Misses Q2 Earnings Estimate, Cuts View: ETFs in Focus).

iShares Semiconductor ETF has amassed $7.6 billion in its asset base and trades in a volume of about 1 million shares a day.

Invesco PHLX Semiconductor ETF (SOXQ - Free Report)

Invesco PHLX Semiconductor ETF tracks the PHLX Semiconductor Sector Index, holding 30 stocks in its basket. Each firm accounts for less than 9% share.

Invesco PHLX Semiconductor ETF has accumulated $65.5 million in its asset base. It charges 19 bps in annual fees and trades in an average daily volume of 43,000 shares.

SPDR S&P Semiconductor ETF (XSD - Free Report)

SPDR S&P Semiconductor ETF offers exposure to the semiconductor segment of the broad technology sector and tracks the S&P Semiconductor Select Industry Index. It holds 39 stocks in its portfolio, with each making up for not more than a 456% share (read: 5 Top-Ranked ETFs That Outperformed in July).

SPDR S&P Semiconductor ETF has AUM of $1.2 billion and an average daily volume of about 75,000 shares. It charges 35 bps in fees per year.

What Lies Ahead?

Despite the slide, the outlook for the industry looks promising provided the CHIPS and Science Act is signed into law by President Joe Biden.

The bill would provide $54 billion in grants for semiconductor manufacturing and research, tens of billions to support regional technology hubs and a tax credit covering 25% of investments in semiconductor manufacturing through 2026. As such, it will encourage investment in chip manufacturing and spur the innovation and development of other U.S. technologies. The bill would help the United States in reclaiming semiconductor industry competence lost to Taiwanese and Korean companies and challenged by the increasingly capable Chinese firms.

Spurred by the bill, many companies have announced more than $44 billion in new semiconductor manufacturing investments. Qualcomm has committed to spending $4.2 billion with chipmaker GlobalFoundries to build processors in New York. Micron will invest $40 billion in memory chip manufacturing capacity that would increase the chipmaker’s U.S. market share from 2% to 10%.  All these efforts should boost the domestic chip industry as the bill will ease supply-chain disruptions and lower the cost for the semiconductor industry. This has created a bullish sentiment in the space (read: Semiconductor ETFs to Buy Now).

Semiconductors have been the most important drivers of the overall growth in technology, given the use of chips in day-to-day life from cars, electronic gadgets to planes and weapons. The demand will continue to trend higher given the increased digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail, among others.

The rapid adoption of cutting-edge technology like cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence, cryptocurrencies, 5G and other advanced information technologies should continue to fuel growth. Further, the introduction of expensive and new generation chips has been leading to an enhancement in the product mix for semiconductors.

Further, the above-mentioned ETFs have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting that these have the potential to outperform in the coming months. About 60% of the industries falling under semiconductors have a solid Zacks Rank in the top 40%.  

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk-tolerant, long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.