Semiconductor ETFs can Rebound From Coronavirus Supply Concerns

Semiconductor stocks and ETFs have been front and center in the coronavirus-induced market slump as the group has been battered amid supply chain concerns, but some points indicators sellers may have gotten overzealous with the VanEck Vectors Semiconductor ETF (NYSEArca: SMH).

SMH, one of the bellwether semiconductor ETFs, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Listed Semiconductor 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor industry. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

“The fallout from the coronavirus’s spread is likely to touch off a global recession that will keep growth in the U.S. GDP flat or down 0.5% and could bring the eurozone economy down 0.5% to 1%, according to a March 17 report from S&P Global Ratings,” reports S&P Global Market Intelligence. “But the demand for processing large amounts of data is likely to grow, not shrink, as work-from-home policies proliferate. That could help chipmakers recover early from any downturn but will also increase pressure on them to adapt quickly to avoid any delays in supply that could leave customers short of product at a time they can least afford to lose a sale.”

Computing Gains With Chip ETFs

U.S. markets have reeled in response to growing fears over the coronavirus contagion that could soon be declared a pandemic, or widespread outbreak across a whole country or the world. Consequently, many investors have taken the opportunity to trim gains after a multi-year run that has pushed U.S. markets to record high levels. With the markets being priced to perfection after strong earnings reports and stable economic growth, the sudden black swan event from a widespread contagion has triggered a precipitous sell-off.

As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters.

“Semiconductor companies have learned how to avoid persistent or crisis-induced bottlenecks by spreading facilities among many Asia-Pacific nations, using air freight rather than surface carriers, and inventory and logistics to adapt to obstacles with little impact to customers downstream, according to Eric Oak, supply chain research analyst for Panjiva,” according to S&P Global Market Intelligence.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.