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Should You Buy the Dip in Semiconductor Stocks With ETFs?
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The semiconductor sector, which was riding high on AI optimism, faltered last month on growing concerns about the long-term demand outlook for semiconductors and weak demand from China. The series of weak earnings from AI players like Advanced Micro Devices (AMD - Free Report) and Super Micro Computer (SMCI - Free Report) was the latest blow, resulting in a sell-off in the broader sector on May 1. Notably, the Philadelphia Semiconductor Index dropped 3.5% on the day (read: Can Q1 Earnings Results Recharge Semiconductor ETFs?).
Inside the Slump
AMD offered downbeat guidance for 2024 sales of its newly released AI chip, which pushed the stock down 9%. Though the company raised its revenue target for MI300 to at least $4 billion from $3.5 billion, Wall Street was looking for a bigger boost from the accelerator business. At least 12 analysts cut their price targets on AMD stock after the company's first-quarter report. However, some analysts are still positive about the company’s growth prospects. They believe that easing supply chain constraints would allow the company to increase its share in the AI chip market and potentially reap billions of dollars in revenues.
Super Micro Computer plunged 14% following its revenue miss amid concerns over the profitability of a new line of servers. However, some analysts raised the target price on the stock following its results, stating that AI is still in the early stages and will continue to grow.
The performance of the duo caused some disappointment, resulting in a decline in other semiconductor stocks. Nvidia (NVDA - Free Report) , which is at the forefront of AI innovations, fell 5.7%. Notably, the three stocks erased a collective $143 billion in market value. Chipmakers like Micron Technology (MU - Free Report) and Marvell Technology (MRVL - Free Report) slid 2.9% and 3.6%, respectively (read: What's Ahead for Nvidia ETFs?).
Skyworks (SWKS - Free Report) stock tumbled 15.3% after the company provided weak revenue guidance on demand concerns as clients struggled to offload excess inventory.
ETF Impact
The terrible trading in the stock world sent the semiconductor ETFs space into red on the day. VanEck Vectors Semiconductor ETF (SMH - Free Report) , iShares Semiconductor ETF (SOXX - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ - Free Report) , Strive U.S. Semiconductor ETF (SHOC - Free Report) and First Trust NASDAQ Semiconductor ETF (FTXL - Free Report) have lost around 3% each on the day.
SMH
VanEck Vectors Semiconductor ETF follows the MVIS US Listed Semiconductor 25 Index and holds 26 stocks in its basket. It favors the largest companies in the industry. VanEck Vectors Semiconductor ETF has managed assets worth $18.3 billion and charges 35 bps in annual fees and expenses.
SOXX
iShares Semiconductor ETF tracks the NYSE Semiconductor Index and holds 30 securities in its basket. It has amassed $12.6 billion in its asset base and charges a fee of 35 bps a year from investors.
SOXQ
Invesco PHLX Semiconductor ETF offers exposure to the largest U.S.-listed securities of companies engaged in the semiconductor business. It tracks the PHLX Semiconductor Sector Index, holding 30 stocks in its basket. It has accumulated $364 million in its asset base and charges 19 bps in annual fees.
SHOC
Strive U.S. Semiconductor ETF seeks broad market exposure to the U.S. semiconductor sector. It follows the Solactive United States Semiconductors 30 Capped Index and holds 32 stocks in its basket. Strive U.S. Semiconductor ETF has AUM of $59.1 million and charges 40 bps in annual fees.
FTXL
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 31 stocks in its basket and charges 60 bps in annual fees. First Trust Nasdaq Semiconductor ETF has $1.4 billion in AUM.
What’s Ahead?
Despite the slide, the outlook for the sector is promising. The semiconductor index is still clearly outpacing the broader market index on a year-to-date basis. The Philadelphia Semiconductor Index is up 8% in the year-to-date time frame compared with a gain of 5.2% for the S&P 500. The sector is also enjoying a strong rally over the past year, gaining more than 53% compared with 23.6% for the S&P 500.
This trend is likely to continue thanks to the rapid development of AI, which will continue to fuel a surge in demand for semiconductor products, driven by its applications in data processing, pattern recognition and machine learning. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to $811.75 billion by 2030 (read: 4 ETFs to Tap the Renewed AI Craze on Wall Street).
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 and electronic gadgets to planes and weapons. Demand will continue to trend higher, given 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, cryptocurrencies, 5G and other advanced information technologies should continue to fuel growth. Further, the introduction of expensive and new-generation chips has been driving an enhancement in the product mix for semiconductors.
Further, the abovementioned five ETFs have a top Zacks Rank #1 (Strong Buy) or #2 (Buy), suggesting that these will outperform the broad market. Additionally, these products have exposure to a number of firms in various types of industries, suggesting that these can easily counter shocks from some of the industry’s biggest components.
Given the strong industry fundamentals and the diversification benefits of ETFs, investors may want to consider the recent slump a buying opportunity.
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Should You Buy the Dip in Semiconductor Stocks With ETFs?
The semiconductor sector, which was riding high on AI optimism, faltered last month on growing concerns about the long-term demand outlook for semiconductors and weak demand from China. The series of weak earnings from AI players like Advanced Micro Devices (AMD - Free Report) and Super Micro Computer (SMCI - Free Report) was the latest blow, resulting in a sell-off in the broader sector on May 1. Notably, the Philadelphia Semiconductor Index dropped 3.5% on the day (read: Can Q1 Earnings Results Recharge Semiconductor ETFs?).
Inside the Slump
AMD offered downbeat guidance for 2024 sales of its newly released AI chip, which pushed the stock down 9%. Though the company raised its revenue target for MI300 to at least $4 billion from $3.5 billion, Wall Street was looking for a bigger boost from the accelerator business. At least 12 analysts cut their price targets on AMD stock after the company's first-quarter report. However, some analysts are still positive about the company’s growth prospects. They believe that easing supply chain constraints would allow the company to increase its share in the AI chip market and potentially reap billions of dollars in revenues.
Super Micro Computer plunged 14% following its revenue miss amid concerns over the profitability of a new line of servers. However, some analysts raised the target price on the stock following its results, stating that AI is still in the early stages and will continue to grow.
The performance of the duo caused some disappointment, resulting in a decline in other semiconductor stocks. Nvidia (NVDA - Free Report) , which is at the forefront of AI innovations, fell 5.7%. Notably, the three stocks erased a collective $143 billion in market value. Chipmakers like Micron Technology (MU - Free Report) and Marvell Technology (MRVL - Free Report) slid 2.9% and 3.6%, respectively (read: What's Ahead for Nvidia ETFs?).
Skyworks (SWKS - Free Report) stock tumbled 15.3% after the company provided weak revenue guidance on demand concerns as clients struggled to offload excess inventory.
ETF Impact
The terrible trading in the stock world sent the semiconductor ETFs space into red on the day. VanEck Vectors Semiconductor ETF (SMH - Free Report) , iShares Semiconductor ETF (SOXX - Free Report) , Invesco PHLX Semiconductor ETF (SOXQ - Free Report) , Strive U.S. Semiconductor ETF (SHOC - Free Report) and First Trust NASDAQ Semiconductor ETF (FTXL - Free Report) have lost around 3% each on the day.
SMH
VanEck Vectors Semiconductor ETF follows the MVIS US Listed Semiconductor 25 Index and holds 26 stocks in its basket. It favors the largest companies in the industry. VanEck Vectors Semiconductor ETF has managed assets worth $18.3 billion and charges 35 bps in annual fees and expenses.
SOXX
iShares Semiconductor ETF tracks the NYSE Semiconductor Index and holds 30 securities in its basket. It has amassed $12.6 billion in its asset base and charges a fee of 35 bps a year from investors.
SOXQ
Invesco PHLX Semiconductor ETF offers exposure to the largest U.S.-listed securities of companies engaged in the semiconductor business. It tracks the PHLX Semiconductor Sector Index, holding 30 stocks in its basket. It has accumulated $364 million in its asset base and charges 19 bps in annual fees.
SHOC
Strive U.S. Semiconductor ETF seeks broad market exposure to the U.S. semiconductor sector. It follows the Solactive United States Semiconductors 30 Capped Index and holds 32 stocks in its basket. Strive U.S. Semiconductor ETF has AUM of $59.1 million and charges 40 bps in annual fees.
FTXL
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 31 stocks in its basket and charges 60 bps in annual fees. First Trust Nasdaq Semiconductor ETF has $1.4 billion in AUM.
What’s Ahead?
Despite the slide, the outlook for the sector is promising. The semiconductor index is still clearly outpacing the broader market index on a year-to-date basis. The Philadelphia Semiconductor Index is up 8% in the year-to-date time frame compared with a gain of 5.2% for the S&P 500. The sector is also enjoying a strong rally over the past year, gaining more than 53% compared with 23.6% for the S&P 500.
This trend is likely to continue thanks to the rapid development of AI, which will continue to fuel a surge in demand for semiconductor products, driven by its applications in data processing, pattern recognition and machine learning. According to a new report by Grand View Research, the global artificial intelligence market is expected to witness a CAGR (2024-2030) of 36.6% to $811.75 billion by 2030 (read: 4 ETFs to Tap the Renewed AI Craze on Wall Street).
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 and electronic gadgets to planes and weapons. Demand will continue to trend higher, given 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, cryptocurrencies, 5G and other advanced information technologies should continue to fuel growth. Further, the introduction of expensive and new-generation chips has been driving an enhancement in the product mix for semiconductors.
Further, the abovementioned five ETFs have a top Zacks Rank #1 (Strong Buy) or #2 (Buy), suggesting that these will outperform the broad market. Additionally, these products have exposure to a number of firms in various types of industries, suggesting that these can easily counter shocks from some of the industry’s biggest components.
Given the strong industry fundamentals and the diversification benefits of ETFs, investors may want to consider the recent slump a buying opportunity.