It Could Be An Epic Day For These Chip ETFs

Starting on Monday, June 22, about 55% of the widely followed PHLX Semiconductor Sector Index (XSOX) reports earnings over the next two weeks, but that index and exchange-traded funds tracking it could be tested as soon as today.

What Happened

On Thursday, Taiwan Semiconductor Manufacturing Co. TSM reports earnings. The stock accounts for just over 4% of the PHLX Semiconductor Sector Index, but its reach extends far beyond that figure.

“Almost 90% of the iShares PHLX Semiconductor ETF SOXX and the VanEck Vectors Semiconductor ETF SMH — the two largest semiconductor ETFs — is in some way connected to the company, known as TSMC,” reports Bloomberg.

So yes, Taiwan Semiconductor's report could easily move the Direxion Daily Semiconductor Bull 3X Shares SOXL or the Direxion Daily Semiconductor Bear 3X Shares SOXS. SOXL tries to deliver triple the daily returns of the PHLX Semiconductor Index while the bearish SOXS attempts to deliver triple the daily inverse returns of that benchmark.

Why It's Important

Various data points confirm the importance of Taiwan Semiconductor in the chip space and its ability to potentially move related ETFs, including SOXL and SOXS.

“Equipment suppliers like ASML Holding NV, Applied Materials Inc., and KLA Corp. all derived more than 10% of their revenue from TSMC in the previous quarter, the data show,” reports Bloomberg. “For example, about 15% of Applied Materials’ fiscal second-quarter revenue came from its relationship with TSMC. Applied Materials has about a 4% weight in both the SOXX and SMH funds.”

Given the importance of Taiwan Semiconductor to broader chip space, it is arguably surprising that SOXL and SOXS have not seen more activity in advance of that company's Thursday report. Data from Direxion indicate SOXL and SOXS have been mostly docile in recent days. That could change next week as more US-based chip companies deliver quarterly results.

What's Next

What Taiwan Semiconductor has to say about its second-half outlook, particularly regarding demand for smartphone chips, will be the driving factor in the stock's near-term performance and likely have a residual impact on the likes of SOXL and SOXS.

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