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What's Behind Nasdaq ETFs' First Two-Straight Week Fall in 2023?

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The Nasdaq Composite Index — the star performer of this year with a 30.4% gain — was off 1.9% last week. With this, the index slumped for two weeks in a row for the first time in 2023. Invesco QQQ Trust (QQQ - Free Report) lost 1.5% last week. The question on everyone's mind is what triggered this decline? Let’s delve deeper into that fact.

Long-Time Winner – Semiconductor – Becomes a Loser

At the heart of Nasdaq's decline lies the performance of semiconductor stocks. Companies like Advanced Micro Devices (AMD - Free Report) , Nvidia (NVDA - Free Report) and Micron (MU - Free Report) witnessed significant selloffs, sending ripples across the entire index. These companies have so far played a key role in the technology sector’s surge, as semiconductors are the pillars of electronic devices, from computers to smartphones to cars.

In recent times, concerns over supply-chain disruptions, geopolitical tensions and macroeconomic uncertainty have added volatility to this sector. The VanEck Semiconductor ETF (SMH - Free Report) recorded a staggering 5.2% decline over the week, marking its worst performance since October 2022. This decline was a significant driver of the Nasdaq's overall fall.

What Did Economic Data Show?

The week started on a positive note with cooling inflation. July's consumer price index (CPI) report showed a year-over-year increase of 3.2%, which was slightly below the Dow Jones consensus estimate of 3.3%.

However, a deeper look at the numbers revealed the underlying concerns. The core CPI, which strips out volatile food and energy costs, rose a considerable 4.7% from the prior year. This high number may lead the Fed to hike rates and growth stocks like technology to underperform in a rising rate environment.

What Lies Ahead?

The U.S. treasury yield increased to 4.16% on Aug 11, 2023 from 4.09% on Aug 7, 2023, having hit a low of 4.00% on Aug 9, 2023. If the Fed keeps rates higher for longer, the move will go against tech investing. Moreover, talks are doing rounds that the full-fledged AI boost will take time to materialize (read: Is It Time for Rotation Into Broad ETFs From Tech-Heavy Ones?).

While Meta, Microsoft and Alphabet are all about AI, the peak of the AI boom will take time to materialize. Microsoft already told investors that growth from its AI services will be "gradual." Microsoft CFO Amy Hood said on the company's earnings call, “the impact of [AI] will be weighted towards [the second half of the 2024 fiscal year]."

Microsoft’s version does make sense. "It's not going to be overnight," Jefferies senior analyst Brent Thill told Yahoo Finance Live. Uber CEO Khosrowshahi explained it nicely saying, “the large language models [that ChatGPT is famous for] are more focused on text and pictures, et cetera...So they're not as extensible at this point into problems like pricing, matching, routing."

ETFs in Focus

Having said this, we would like to note that investors should monitor the broader market closely. If the tech-heavy Nasdaq gives more signs of underperformance, investors can bet on inverse tech ETFs.

Direxion Daily Technology Bear 3X Shares (TECS - Free Report) – Up 9.7% Last Week

Direxion Daily Semiconductor Bear 3x Shares (SOXS - Free Report) – Up 9.5%

Proshares Ultrashort Semiconductors (SSG - Free Report) – Up 8.1%

ProShares UltraPro Short QQQ (SQQQ - Free Report) – Up 4.4%

ProShares UltraShort QQQ (QID - Free Report) – Up 2.9%

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