Why October Spells Doom for Semis: ETFs in Focus

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Chip stocks are facing tough times with the Philadelphia Semiconductor Index slipping for four straight weeks, the longest streak since May 2016. The heavy selloffs have turned October into the worst month for chip stocks since May 2012 . Investors should specifically note that semiconductor stocks witnessed "their worst day in a decade " on Oct 24.

VanEck Vectors Semiconductor ETF SMH lost 6.7% on Oct 24, the biggest slump for the group since November 2008 and is off about 16.3% in the past month (as of Oct 24, 2018). Chipmaker Nvidia NVDA in the meantime saw "its worst day since May 2011 ." Investors should note that major components of the fund have slipped into a bear market, per CNBC.

Investors are yanking assets from the fund as the $829.7-million fund (currently) lost $276.5 million in assets in October, among which $220.3 million of outflows happened in the Oct 11-Oct 24 period, per etf.com.

Let's take a look at what caused the heavy losses.

US-Sino Trade War

Trade disputes between the United States and China have been posing threats to the sector. The Trump administration levied tariffs on Chinese goods worth of $200 billion starting Sep 24. The tariffs started at 10% but will shoot up to 25% on Jan 1, 2019. Before this, Trump had enacted 25% tariffs on $50 billion of Chinese goods (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs ).

Semiconductor is one of the vulnerable sectors out of this trade war. Per Morgan Stanley equity strategists, "semiconductor and semiconductor equipment companies have the highest revenue exposure to China at  52% " and are thus exposed to maximum risks on rising trade tensions (read:  Apple's iPhone Order Cut Report May Hurt These ETFs ).

Chipmaker  Qualcomm  QCOM has 65% revenue exposure to China and Nvidia's sales exposure to China is  56% , per Goldman Sachs. Apart from these, tech and semiconductor companies, which have sales exposure to China in the range of  22% to 55% , include Intel INTCMicron Technology  MU and  Applied Materials  AMAT . This clearly explains why the mood is somber in the semiconductor space and why SMH is in deep trouble (read: US-Sino Trade War Escalates: Most Vulnerable Sector ETFs ).

Downbeat Earnings Guidance

Gloomy earnings guidance from a few industry behemoths deepened the gloom. Some of the companies that added to the market jitters were Taiwan Semiconductor Manufacturing TSM (down 4% on Oct 24) and Advanced Micro Devices Inc. AMD (down 9.2% on Oct 24). Advanced Micro Devices' revenues also fell below theguidance . Industry bellwethers like STMicroelectronics STM (down 13.8% on Oct 24) also cautioned about the future weakness, per an article published on seeking alpha.

Overvaluation Concerns

Many analysts believe that super-rich valuations of tech companies are getting adjusted amid market turmoil. Since tech stocks are high-flying, analysts are setting their models in line with the rising rate expectations. In early October, Raymond James lowered its 2019 earnings estimates for eight chip stocks, expecting companies to see weakness in business activity, per an article published on CNBC. The firm also cut its view for several chip stocks in late September, citing a "cyclical downturn" in the sector.

What Lies Ahead for Semiconductor ETFs?

Since several analysts are flagging concerns over the sector, investors should be cautious about semiconductor investing. Goldman Sachs Group Inc. cautioned about supply and pricing issues weighing on memory chipmakers could deteriorate in 2019.

So, investors who are skeptical about semiconductor investing may consider inverse semiconductor ETFs like Direxion Daily Semiconductor Bear 3x Shares SOXS (up 60.1% in the past month) and ProShares Ultra Short Semiconductors SSG (up 36.7% in the past month) (see all Technology ETFs here).

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QUALCOMM Incorporated (QCOM): Free Stock Analysis Report

Advanced Micro Devices, Inc. (AMD): Free Stock Analysis Report

VANECK-SEMICON (SMH): ETF Research Reports

NVIDIA Corporation (NVDA): Free Stock Analysis Report

STMicroelectronics N.V. (STM): Free Stock Analysis Report

Intel Corporation (INTC): Free Stock Analysis Report

Micron Technology, Inc. (MU): Free Stock Analysis Report

Applied Materials, Inc. (AMAT): Free Stock Analysis Report

Taiwan Semiconductor Manufacturing Company Ltd. (TSM): Free Stock Analysis Report

PRO-ULS SEMICON (SSG): ETF Research Reports

DIR-D SM BR 3X (SOXS): ETF Research Reports

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs
Referenced Symbols: QCOM , AMD , SMH , NVDA , STM

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