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Apple Woes Trigger Tech Sector Rout: ETFs Under Threat

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Just as tech stocks rebounded in November from the worst sell-offs in early October mainly due to rising rate and overvaluation concerns, a slump in Apple Inc AAPL shares again caused a rout in the tech space. Apple was down more than 5% on Nov 12, the lowest in more than three months. It lost about 0.7% after hours.

The company’s the main supplier for its Face ID technology, Lumentum Holdings Inc. (LITE - Free Report) , cut its revenue and profit forecasts due to lower orders from a major customer. Apprehending that this customer could only be Apple, panic spread across the market. Lumentum stock plunged about 33% on Nov 12.

Another supplier, Japan Display, a supplier of liquid crystal display screens for iPhones, cut its full-year guidance on “volatile customer demand” on Nov 12. Japan Display shares dived 7.6% on Nov 13 to a record low, as quoted on Financial Times.

Apple Guided Lower in Earnings Season

Investors should note that Apple guided lower in its last earnings release. The gadget-maker foresees revenues in the range of $89-$93 billion for the first quarter of fiscal 2019. The midpoint is below the current Zacks Consensus Estimate of $91.32 billion.

On its earnings call, Apple said that the company will no longer report individual sales numbers for iPhone, iPad and Mac starting next quarter. The three main product lines will be wrapped into one reported revenue figure (read: Apple Beats, Guides Lower: ETFs in Focus).

Chip Stocks in the Red

Such downbeat guidance hit other suppliers hard, crushing chip stock makers. Asia’s Apple assemblers Pegatron and Hong Hai Precision Industry, also known as Foxconn, dropped 5.7% and 2.6%, respectively, in Taipei, while Wistron fell 3.7%, according to Financial Times. Laragan Precision, which makes camera lenses for iPhones retreated as much as 5.7% and chipmaker Taiwan Semiconductor Company dropped 3.7% on Tuesday, according to Financial Times.

IMF said that the smartphone-driven tech cycle had probably topped in late 2015. Now, saturation in demand in developed markets and lengthening of upgrade cycles are weighing on overall smartphone sales.

This is not the first time that concerns over waning demand for iPhones have risen. Such fears had also cropped up in June. All in all, fears of demand for iPhones peaking made the tech sector go into a tailspin on Nov 12 (read: Apple's iPhone Order Cut Report May Hurt These ETFs).

Below we highlight a few ETF areas that may be troubled if demand for iPhones continues to trend lower.

Apple ETFs

ETFs which have considerable exposure to Apple may thus underperform. These funds include iShares U.S. Technology ETF IYW (down 3.4% on Nov 12), Select Sector SPDR Technology ETF XLK (down 3.5%) and Vanguard Information Technology ETF VGT (down 3.4%) (see all Technology ETFs here).

Semiconductor ETFs

Apple’s suppliers, meaning several semiconductors companies should bear the brunt of it.

VanEck Vectors Semiconductor ETF SMH (down 4.4% on Nov 12 and has lost another 4.4% after hours), SPDR S&P Semiconductor ETF XSD (down 5% opn Nov 12), iShares PHLX Semiconductor ETF SOXX (down 4.5% on Nov 12) and PowerShares Dynamic Semiconductors ETF PSI (down 4.6% on Nov 12) should be on high alert.

Taiwan ETF

The fate of pure-play Taiwan ETF, iShares MSCI Taiwan ETF EWT (down 1.3% on Nov12), is often related to Apple. This is because the fund puts heavy weights in Apple’s suppliers like TSMC and Hon Hai Precision.

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