Semiconductor ETFs Recoil On Morgan Stanley Warnings

The hot and the soaring semiconductor corner of the broad technology market had a rough ride on Nov 27. The decline came as Morgan Stanly raised concerns on soaring memory chip prices and downgraded a number of chipmakers including Western Digital WDC, Samsung Electronics, and Taiwan Semiconductor TSM.

The dual tailwind of strong demand and high price has benefited the industry throughout the year and this trend now seems to be reversing. Morgan Stanley cautioned that the so-called "super-cycle" in chip demand may be coming to an end, and prices for memory chips will peak soon. As such, the analyst thinks it is now time to reduce exposure to Nand (flash memory) and Asian semiconductor names.

The action took a toll on the industry, leading to profit taking and pushing the chip stocks lower. Samsung tumbled 5.1%, the biggest one-day fall in more than a year, Western Digital plunged 6.7% and Taiwan Semiconductor dropped 4.4%. The weakness has spread to the other players with Micron Technology MU falling 3% and Nvidia NVDA slipping 1.1%. The Philadelphia Semiconductor Index fell 1.3%, reflecting the biggest percentage loss in more than two weeks. This suggests some rough trading in the coming days (read: Tap Nvidia Growth Story With These Tech ETFs).

ETF Impact

The awful trading in the stock world also pushed the semiconductor ETF space into the red on the day. In particular, VanEck Vectors Semiconductor ETF SMH, PowerShares Dynamic Semiconductors Fund PSI and First Trust Nasdaq Semiconductor ETF FTXL stole the show with a nearly 1.5% fall (see: all the Technology ETFs here).

Below we profile these ETFs in detail and discuss some of the specifics behind their recent slump:

SMH

This fund provides exposure to 26 securities by tracking the MVIS US Listed Semiconductor 25 Index. It is highly concentrated on the top two firms, TSM and Intel INTC, at over 10% share each while other firms hold no more than 5.61% of assets. The product has managed assets worth $1.5 billion and charges 36 bps in annual fees and expenses. It is heavily traded with a volume of around 3.3 million shares per day.

PSI

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in its basket with none accounting for more than 5.6% of assets. It has AUM of $412.2 million and sees a moderate average daily volume of 82,000 shares. Expense ratio comes in at 0.63% (read: S&P 500 Tops 2600: ETFs & Stocks That Deserve Special Thanks).

FTXL

This fund offers exposure to the most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. Holding 30 stocks in its basket, it is highly concentrated on MU while other firms hold less than 8.5% share. FTXL has accumulated $27.5 million in AUM and trades in light average daily volume of around 7,000 shares. Expense ratio comes in at 0.60%.

What Lies Ahead?

Despite the slide, the outlook for the industry is promising. The semiconductor industry and ETFs are clearly outpacing the broad market index and the fund from the year-to-date look. In fact, the industry is enjoying a strong rally this year, gaining about 46%.

This trend is likely to continue this year thanks to improved overseas demand and innovative technologies. Rapid adoption of cloud, Internet of Things, autonomous cars, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence and other advanced information technologies are fueling demand for chips and other semiconductor products. The PC market is also stabilizing and will likely see strong growth in the coming months.

Semiconductors have been the most important driver of overall technology growth as it is now used in day-to-day life from cars, electronic gadgets to planes and weapons (read: 7 Top-Ranked Tech ETFs on Unstoppable Rally).

Further, the three products detailed above have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting that these have the potential to outperform in the coming months. About 85% of the industries falling under semiconductors have a solid Zacks Rank in the top 50%.  

Given the solid outlook but somewhat bearish near-term sentiments, investors may want to consider staying on the sidelines for the time being. However, risk tolerant long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.

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Western Digital Corporation WDC: Free Stock Analysis Report
 
PWRSH-DYN SEMI PSI: ETF Research Reports
 
VANECK-SEMICON SMH: ETF Research Reports
 
FT-NDQ SEMICON (FTXL): ETF Research Reports
 
NVIDIA Corporation NVDA: Free Stock Analysis Report
 
Micron Technology, Inc. MU: Free Stock Analysis Report
 
Taiwan Semiconductor Manufacturing Company Ltd. TSM: Free Stock Analysis Report
 
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