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.
“This skepticism is seen elsewhere, too, with options traders favoring puts over calls in the past two weeks. Data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) shows SMH with a top-heavy 20-day put/call volume ratio of 7.30,” according to Schaeffer’s.
Related: Semiconductor ETFs Strengthen on Potential Broadcom, Qualcomm Deal
“Worldwide semiconductor revenue is forecast to total $401.4 billion in 2017, an increase of 16.8 percent from 2016,” according to Gartner, Inc. “This will be the first time semiconductor revenue has surpassed $400 billion. The market reached the $300 billion milestone seven years ago, in 2010, and surpassed $200 billion in 2000.”
Semiconductor ETFs have recently been durable performers as semiconductor stocks are rebounding to steady the broader technology sector, but that does not mean the gains are over for this suddenly hot group. However, valuations are rising for chip stocks.
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