Why Friday May Prove to be an Important Day For Chip ETFs

Last Friday was another bad day for broader equity benchmarks and the technology sector was not spared from that carnage. However, there were some interesting happenings among ETFs dedicated to the sector.

Specifically, the VanEck Vectors Semiconductor ETF (NYSEArca: SMH) performed noticeably poorly than broader benchmarks and came to rest at its 200-day moving average, indicating that it could bounce off that key technical level.

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.

“On the whole, chip stocks fared best on Friday with as 13 out of the 16 chip stocks on the S&P 500 traded in positive territory Friday, beating out every other tech subsector on the index,” reports Wallace Witkowski for MarketWatch.

Don’t Rush to Cash in Chips

With the novel coronavirus having spread from China to other technology hubs, such as South Korea and Japan, there remains an element of uncertainty surrounding tech names, including chip fare.

“The coronavirus outbreak has resulted in weakening demand and supply chain disruptions in China’s manufacturing sectors of components, consumer electronics, and consumer durables,” said Moody’s Investors Service in a note out Wednesday.

Conversely, if the coronavirus becomes contained, some market observers expected a V-shaped recovery, one that would likely benefit growth stocks, including chipmakers.

Cutting-edge chipmakers are the best-performing industry across sectors and regions as more consumers acquire internet-connected devices. Semiconductors now make up some of the most essential products and technologies we use every day, such as advanced mobile networks, iPhones and the new generation of artificial intelligence.

Over the past decade, semiconductor companies have grown more efficient, reducing costs and increasing production. Chipmakers learned to streamline production and improve their capacity planning and equipment spending. Meanwhile, chip demand surged as the global economy expanded. In other words, fundamentals remain sound for the group and upside could be had if markets price in coronavirus as a near-term blip, not a pandemic.

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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.