Following a week in which the Market Vectors Semiconductor ETF (NYSEArca: SMH) and the iShares PHLX Semiconductor ETF (NasdaqGM: SOXX) lost 4.1% and 5.2%, respectively, semiconductor exchange traded funds could use some good news.
Those ETFs and others could get that much-needed good news if Intel (NasdaqGS: INTC), the world’s largest semiconductor manufacturer by market value, proceeds with its rumored purchase of rival Altera (NasdaqGS: ALTR).
Underscoring just how glum things were for chip ETFs last week, SMH and SOXX posted the aforementioned weekly losses despite closing higher by an average of 3% last Friday after media reports surfaced that Intel is in talks to acquire Altera, which makes chips for embedded devices and data servers.
The news was originally reported by the Wall Street Journal, which notes that a deal for Altera would be the largest acquisition in Dow component Intel’s history. After closing higher by 28.4% last Friday, Altera has a market value almost $13.4 billion.
The SPDR S&P Semiconductor ETF (NYSEArca: XSD), an equal-weight ETF with nearly $175 million in assets under management, features Altera among its top 10 holdings. Combined, XSD allocates nearly 5.1% of its combined weight to Altera and that company’s chief rival Xilinx (NasdaqGS: XLNX), a stock that surged nearly 6% last Friday in sympathy with Altera.
Over the past year, XSD is up nearly 28%. The ETF has been previously highlighted as an ideal industry ETF in rising interest rate environments. For example, the ETF does have exposure cash-rich large-cap chipmakers, several of which have been recent dividend growers. Dividend growth stocks are, historically, excellent rising rates and inflation fighters. [Cash-Rich Sector ETFs for Rising Rates]
SMH has an almost 2.6% weight to Altera and a nearly 19.3% weight to Intel, making that stock the ETF’s largest holding. Amid last week’s retrenchment in the semiconductor space, investors pulled almost $255 million from SMH. [More Pain for Chip ETFs]
Adding to the concern surrounding chip stocks and the relevant ETFs is the notion that veracity of the semiconductor trade is now being threatened, which could prompt professional traders to take profits on what, to this point, has been a lengthy, rewarding trade from the long side. Increased deal-making in the industry could serve to change that, particularly if larger players decide to engage smaller chip manufacturers that recently experienced significant drops in share price.
The $549 million SOXX, which has lagged XSD and SMH over the past year, allocates about 10% of its combined weight to Intel and Altera.
SPDR S&P Semiconductor ETF
