Semiconductor ETFs returned in the range of 43.1% to 55.1% in the past year (as of Jan 28, 2020) despite ups and downs in U.S.-China trade tensions. While the space is performing decently in 2020, gaining in the range of 2.3% to 3.6%, it slumped last week thanks to the outbreak of coronavirus. U.S. chip stocks have substantial exposure to China, which is why the coronavirus event hit the sector hard.
This is raising an alarm as the number of confirmed cases of the Wuhan coronavirus has topped the 2003 SARS outbreak inside mainland China, per CNN. As of Jan 29, there were 5,974 confirmed cases of the virus in China, including a 132 death toll, according to China's National Health Commission (NHC).
Buy the Slump in Semiconductor Stocks
The impact of coronavirus is likely to be short term in nature, no matter how big a shape it can take. Previously, SARS was estimated to have reduced GDP growth in East Asia by around 0.5 to 1 percentage point in 2003, per the Australian Government’s Treasury department. The economic disruption was relatively short-lived, with the worst impact noted in the June quarter of 2003. So, one can bet on the chip stocks and ETFs with a long-term view and take advantage of the virus-driven slump.
Per IHS Markit, 5G boom will play a major role in saving the semiconductor industry in the form of creating demand for microchips. By the end of 2020, 5G handset sales (15-20 million units) should make up about 1% of total smartphone sales, per Deloitte.
IDC expects 5G shipments to reach 8.9% of smartphones shipped in 2020. The figure is expected to be 28.1% of global smartphone shipments by 2023.With this, IDC expects the smartphone market to record 1.6% growth in 2020, after three straight years of global contraction.
Gartner too expects smartphone sales to grow again in 2020 after a decline in 2019, thanks to the “broader availability of 5G models and the promotion of 5G service packages in various parts of the world by communications service providers."
Along with various analysts, we too believe that top semiconductor companies like Intel, Samsung, Taiwan Semiconductor, Qualcomm, Broadcom and others will be great beneficiaries of the aforesaid trend (read: Chip ETFs to Surge on Intel's Solid Q4 Earnings, Upbeat View).
IDC also indicated that consumer spending on traditional and emerging technologies will remain solid over the 2019-2023 forecast period, with a five-year CAGR of 5.1%. Rising enterprise spending and emerging technologies like cloud computing, AI and big data are acting as catalysts for the semiconductor sector.
PC shipments are also showing signs of improvement. The global market for traditional PCs, inclusive of desktops, notebooks, and workstations, closed 2019 on a strong note with fourth-quarter growth of 4.8% year over year.
Against this backdrop, investors can bet on the below-mentioned ETFs (read: Don't Panic About Virus, Buy 5 Beaten-Down Top-Ranked ETFs).
Invesco Dynamic Semiconductors ETF (PSI - Free Report) – Zacks Rank #1 (Strong Buy)
VanEck Vectors Semiconductor ETF (SMH - Free Report) – Zacks Rank #2 (Buy)
SPDR S&P Semiconductor ETF (XSD - Free Report) – Zacks Rank #2
iShares PHLX Semiconductor ETF (SOXX - Free Report) – Zacks Rank #2
First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) – Zacks Rank #3 (Hold)
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