New U.S. Restrictions Deal a Blow to Semiconductor ETFs | ETF Trends

Semiconductor sector-specific exchange traded funds plunged Thursday after the U.S. restricted the sales of high-end chips to China.

On Thursday, the iShares PHLX Semiconductor ETF (NasdaqGS: SOXX) decreased 1.9%, the VanEck Vectors Semiconductor ETF (SMH) declined 2.2%, and the Invesco PHLX Semiconductor ETF (SOXQ) fell 1.7%.

The U.S. government has specifically restricted exports of two of Nvidia’s computing chips used for the development of artificial intelligence, including the H100 and A100, to China, Reuters reports.

“This is a big step by the U.S. because it is targeting high performance processors that are mainly used for commercial applications,” Handel Jones, chief executive of consulting firm International Business Strategies Inc, told the Wall Street Journal.

Nvidia, the world’s biggest chipmaker, stated that the new restrictions on exports to China could cost the company $400 million in sales.

China has been heavily invested in artificial intelligence as a top strategic technology, but Chinese AI development has been largely reliant on U.S. chip manufacturers like Nvidia’s advanced semiconductors that are key components in complex algorithms.

“On the surface, it looks like the U.S. government is looking to refrain from sales of next generation advanced chips, 7 nanometers and below, specifically for military end use in China,” CFRA Research analyst Angelo Zino told Reuters.

Market observers have warned that the new U.S. restrictions could negatively affect a wide range of Chinese technology companies, including Alibaba Group Holding, Tencent Holdings, Baidu, and Huawei Technologies, among others.

Chinese companies have used advanced chips to train AI algorithms and high-performance computing, including speeding up analysis for sectors like healthcare, finance, and manufacturing.

“There are no direct local substitutes,” Edison Lee, a Hong Kong-based analyst at investment bank Jefferies, said in a research report.

An alternative would be for Chinese companies to pull together multiple lower-end processors that do not fall under the new U.S. restrictions, Lee added.

For more news, information, and strategy, visit VettaFi.