Tempting Fate With Semiconductor ETFs

The VanEck Vectors Semiconductor ETF (NYSEArca: SMH) and rival semiconductor ETFs jumped on Monday on news after Broadcom (NasdaqGS: AVGO) proposed to acquire Qualcomm (NasdaqGS: QCOM), in what would be the biggest acquisition in the history of the technology sector, assuming it is completed.

While those headlines lifted SMH to a record high, some traders were caught in a bind with the semiconductor ETF because short interest in the high-flying fund has been rising in recent weeks.

“Nevertheless, short sellers are still flocking to the chip ETF. Short interest increased by 3.7% during the last reporting period to 19.77 million shares. It would take more than 11 days for these bearish bettors to fully cover their positions, at SMH’s average daily trading volume. This is a major source of potential buying power that could enter the market,” according to Schaeffer’s Investment Research.

At the end of the third quarter, both Qualcomm and Broadcom were among SMH’s top 10 holdings. The ETF allocates over 19% of its combined weight to Taiwan Semiconductor (NYSE:TSM) and Intel Corp. (NASDAQ:INTC).

The initial optimism over the deal may have waned as some argued Qualcomm may reject the $70-per-share cash and stock deal on grounds that it’s opportunistic and posses regulatory risks, Bloomberg reports. Qualcomm company stocks have weakened in the past year over its legal fight with Apple (NasdaqGS: AAPL), which has led to some calling this a low opportunistic grab by Broadcom.