Sizing Up Semiconductors Stocks, ETFs for Long-Term Opportunities

Lingering supply chain issues. Broader distaste for growth stocks. Slumping demand for some marquee electronics. Geopolitical issues. Add it all up, and it’s a toxic brew in 2022 for semiconductor stocks and exchange traded funds.

The VanEck Vectors Semiconductor ETF (SMH) — one of the bellwethers among chip ETFs — is down 34.45% year-to-date. Indeed, that’s enough to concern investors and prompt some to stay away from chip stocks and ETFs.

While the proper course of action may not be to immediately run back to semiconductor assets such as SMH, investors shouldn’t wholesale ignore the group, either. Taking a long-term perspective of this cyclical industry could pay off for patient, risk-tolerant market participants.

“Although it’s important to understand the risks associated with the semiconductor space, we believe there are still long–term opportunities,” wrote Nicolas Frasse, VanEck associate product manager. “Recent volatility has presented much more attractive stock prices, and the current volatility has been driven more by headline risk rather than weakening demand or other structural issues within the industry. Strong continued demand for chips, coupled with an increase in domestic chip production from government incentives, should create less cyclicality within the semiconductor sector.”

Another issue that’s weighing on chip stocks this year is ongoing geopolitical tension between the U.S. and China — the world’s two largest economies. Much of that stems from China’s sabre rattling toward Taiwan and lack of clarity on exactly how the U.S. would respond if China invades the island.

Taiwan is a crucial piece in the global semiconductor industry puzzle. SMH reflects as much with an 11.58% weight to Taiwan Semiconductor, which is the largest chip foundry operator in the world. In a recent “60 Minutes” interview, President Biden said that U.S. forces would aid Taiwan in the event of a Chinese invasion, but his comments were later walked back.

U.S./China tensions underscore the importance of U.S.-based SMH member firms reshoring more of their operations, indicating that if that happens in earnest, it could be a long-term positive for the VanEck ETF.

“Governments across the globe have increased investments in semiconductor manufacturing to bring more manufacturing to their respective countries. A big one is the U.S.’s CHIPS act, which aims to reshore chip manufacturing to assist American companies with supply chain issues. The act places incentives for current companies to build manufacturing facilities in the U.S. As a result, Intel is building a $20B plant in Columbus, OH, and TSM is building a $12B plant in North Phoenix,” concluded Frasse.

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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.