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What Awaits Semiconductor ETFs in Post-Lockdown World?
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The semiconductor industry, which is a relatively value-centric corner of the high-growth technology space, has been steady amid coronavirus-related stock market volatility. However, it has fallen short of its high-growth counterparts like cloud computing, software and Internet.
The largest semiconductor ETF iShares PHLX Semiconductor ETF (SOXX - Free Report) has gained about 17% past month (as of May 5, 2020), lower than the tech-heavy Nasdaq-100 ETF QQQ (up 18.7%) and the broader tech ETF XLK (up 18.4%). SOXX has also underperformed WisdomTree Cloud Computing Fund (WCLD - Free Report) (up 30.6%), SPDR S&P Software & Services ETF (XSW - Free Report) (up 24.6%) and Invesco NASDAQ Internet ETF (PNQI - Free Report) (up 21.5%).
What’s Behind the Underperformance?
Before the COVID-19 outbreak, worldwide semiconductor revenues declined 12.2% in 2019, according to the latest update of the IDC Semiconductor Applications Forecaster (SAF). Decline of 37.3% and 27.7% in the DRAM and NAND flash memory chips that are the key building blocks in smartphones and cloud computing technologies, respectively, after more than two years of strong growth, weighed on the broader semiconductor space.
The virus outbreak is now likely to drag the semiconductor space down by another 4.2% in 2020, per IDC. Excluding the DRAM and NAND flash memory chips, semiconductors are expected to decline by 7.2% in 2020.
Any Hope of a Better Run Ahead?
Certain things are falling into place for the semiconductor space lately. Demand should perk up following the reopening of economies. One beaten-down area — smartphones — thwarted demand for chips in recent times, but should be up for a revival in the coming days.
Smartphones: A Solid Driver Now
Micron Technology (MU - Free Report) — one of the world’s largest producers of DRAM and NAND flash memory chips — lately indicated that demand for smartphones in China has started to rebound post coronavirus lockdown.
If the Chinese lockdown model is any guide, one can expect a similar revival in most of the other global economies. Moreover, sales of smartphones should gain steam in the coming quarters as coronavirus-related social distancing has brightened demand for digitization (read: Bet on Digital Payments With These ETFs and Stocks).
With the virus uncertainty here to stay for at least a few more months, online activities — both essential and non-essential — would be in the cards and so would be the usage of smartphones. This is great news for semiconductor companies. Apple (AAPL - Free Report) CEO Tim Cook also took notice of recovering demand in China through April.
5G Boom to Aid
The 5G boom will play a major role in saving the semiconductor industry in the form of creating demand for microchips. By the end of 2020, 5G handset sales (15-20 million units) should make up about 1% of total smartphone sales, said Deloitte, before the virus outbreak.
Per IDC, “5G volumes will grow this year despite the demand uncertainty, driving strong semiconductor content as OEMs position 5G in lower tiers to broaden the reach. OEMs in China are likely to focus on launching 5G devices to leverage potential subsidies by carriers later this year. There are 5G phones that have started selling for under $300 in China.”
Decent M&A Environment
There has been a pickup in mergers and acquisitions.Amid coronavirus-related uncertainties, Intel (INTC - Free Report) and Nvidia (NVDA - Free Report) announced two acquisitions that can facilitate their existing portfolio (read: "Merger Monday" to Benefit These ETFs).
Intel is buying mobility app Moovit for $900 million, three years after it acquired Mobileye for $15.3 billion. With the addition of Moovit, Intel hopes to build out Mobileye as a “complete mobility provider” with a forecast market of $160 billion by 2030.
And Nvidia said it is acquiring data center networking specialist Cumulus Networks for an undisclosed amount. Nvidia recently closed the $6.9-billion acquisition of Mellanox Technologies Ltd., after it received antitrust approval from Chinese regulators in mid-April.
The semiconductor space had made about 30 acquisitions in 2019, which had a combined value of $31.7 billion, up 22% year over year, according to data compiled by IC Insights, as quoted on evertiq.com. The 2019 value of semiconductor acquisition agreements was the third-highest annual total ever.
ETFs in Focus
Against this backdrop, investors can keep a tab on the ETFs like VanEck Vectors Semiconductor ETF (SMH - Free Report) , SPDR S&P Semiconductor ETF (XSD - Free Report) , Invesco Dynamic Semiconductors ETF (PSI - Free Report) and First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) .
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What Awaits Semiconductor ETFs in Post-Lockdown World?
The semiconductor industry, which is a relatively value-centric corner of the high-growth technology space, has been steady amid coronavirus-related stock market volatility. However, it has fallen short of its high-growth counterparts like cloud computing, software and Internet.
The largest semiconductor ETF iShares PHLX Semiconductor ETF (SOXX - Free Report) has gained about 17% past month (as of May 5, 2020), lower than the tech-heavy Nasdaq-100 ETF QQQ (up 18.7%) and the broader tech ETF XLK (up 18.4%). SOXX has also underperformed WisdomTree Cloud Computing Fund (WCLD - Free Report) (up 30.6%), SPDR S&P Software & Services ETF (XSW - Free Report) (up 24.6%) and Invesco NASDAQ Internet ETF (PNQI - Free Report) (up 21.5%).
What’s Behind the Underperformance?
Before the COVID-19 outbreak, worldwide semiconductor revenues declined 12.2% in 2019, according to the latest update of the IDC Semiconductor Applications Forecaster (SAF). Decline of 37.3% and 27.7% in the DRAM and NAND flash memory chips that are the key building blocks in smartphones and cloud computing technologies, respectively, after more than two years of strong growth, weighed on the broader semiconductor space.
The virus outbreak is now likely to drag the semiconductor space down by another 4.2% in 2020, per IDC. Excluding the DRAM and NAND flash memory chips, semiconductors are expected to decline by 7.2% in 2020.
Any Hope of a Better Run Ahead?
Certain things are falling into place for the semiconductor space lately. Demand should perk up following the reopening of economies. One beaten-down area — smartphones — thwarted demand for chips in recent times, but should be up for a revival in the coming days.
Smartphones: A Solid Driver Now
Micron Technology (MU - Free Report) — one of the world’s largest producers of DRAM and NAND flash memory chips — lately indicated that demand for smartphones in China has started to rebound post coronavirus lockdown.
If the Chinese lockdown model is any guide, one can expect a similar revival in most of the other global economies. Moreover, sales of smartphones should gain steam in the coming quarters as coronavirus-related social distancing has brightened demand for digitization (read: Bet on Digital Payments With These ETFs and Stocks).
With the virus uncertainty here to stay for at least a few more months, online activities — both essential and non-essential — would be in the cards and so would be the usage of smartphones. This is great news for semiconductor companies. Apple (AAPL - Free Report) CEO Tim Cook also took notice of recovering demand in China through April.
5G Boom to Aid
The 5G boom will play a major role in saving the semiconductor industry in the form of creating demand for microchips. By the end of 2020, 5G handset sales (15-20 million units) should make up about 1% of total smartphone sales, said Deloitte, before the virus outbreak.
Per IDC, “5G volumes will grow this year despite the demand uncertainty, driving strong semiconductor content as OEMs position 5G in lower tiers to broaden the reach. OEMs in China are likely to focus on launching 5G devices to leverage potential subsidies by carriers later this year. There are 5G phones that have started selling for under $300 in China.”
Decent M&A Environment
There has been a pickup in mergers and acquisitions.Amid coronavirus-related uncertainties, Intel (INTC - Free Report) and Nvidia (NVDA - Free Report) announced two acquisitions that can facilitate their existing portfolio (read: "Merger Monday" to Benefit These ETFs).
Intel is buying mobility app Moovit for $900 million, three years after it acquired Mobileye for $15.3 billion. With the addition of Moovit, Intel hopes to build out Mobileye as a “complete mobility provider” with a forecast market of $160 billion by 2030.
And Nvidia said it is acquiring data center networking specialist Cumulus Networks for an undisclosed amount. Nvidia recently closed the $6.9-billion acquisition of Mellanox Technologies Ltd., after it received antitrust approval from Chinese regulators in mid-April.
The semiconductor space had made about 30 acquisitions in 2019, which had a combined value of $31.7 billion, up 22% year over year, according to data compiled by IC Insights, as quoted on evertiq.com. The 2019 value of semiconductor acquisition agreements was the third-highest annual total ever.
ETFs in Focus
Against this backdrop, investors can keep a tab on the ETFs like VanEck Vectors Semiconductor ETF (SMH - Free Report) , SPDR S&P Semiconductor ETF (XSD - Free Report) , Invesco Dynamic Semiconductors ETF (PSI - Free Report) and First Trust Nasdaq Semiconductor ETF (FTXL - Free Report) .
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>