Semiconductor stocks and sector-related exchange traded funds may be among the most vulnerable areas of the market if negotiations between China breakdown and President Donald Trump’s tariff threats are implemented.
Analysts argued that companies with high revenue exposure to China, such as semiconductors, will likely take a hit if tariffs are ramped up on Chinese imports, CNBC reports.
Specifically, HSBC complied a list of companies with big sales in China most sensitive to trade, and U.S. companies with major China exposure are concentrated in the technology sector, including names like Broadcom (NasdaqGS: AVGO), Micron Technology (NasdaqGS: MU) and Intel (NasdaqGS: INTC).
This does not bode well for semiconductor ETFs, such as iShares PHLX Semiconductor ETF (NasdaqGM: SOXX), which has heavy tilts to these highly exposed semiconductor companies. SOXX’s top holdings include Broadcom 7.9% and Intel 6.8%, along with Micron Technology 3.6%.
”Semiconductor suppliers have relatively high ‘ship-to’ revenue exposure to China,” Quinn Bolton, senior semiconductor analyst at Needham, said in a note. “This high exposure to China puts the semiconductor sector at greater risk to the escalation in the U.S.-China trade war than many other segments of technology.”
However, some see the pullback in this technology segment as a potential buying opportunity.
“We at CFRA are still positive on a number of those semiconductor companies that you find in the concentrated SMH and the SOXX ETFs,” Todd Rosenbluth, senior director of ETF and mutual fund research at CFRA, told CNBC, referring to the ticker symbols for VanEck’s and iShares’ ETFs. “Larger-cap companies tend to hold up better in times of market volatility.”
The current round of weakness is attributed to short-term, fear-driven selling, which does not reflect the sector’s strong quarterly earnings and fundamentals.
“Clearly, what we’re seeing today is people are selling first and asking questions later,” Morningstar’s Ben Johnson told CNBC. “This is a segment of the market that’s done phenomenally well over the course of the past one, three, five and 10 years, but the price investors have paid for that great performance has been measured in increments of volatility.”
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