The semiconductor space has been rebounded nicely, outpacing the broad markets this year. But of late, the space has shown some weakness due to the sharp fall in price of Intel Corp. (INTC), the largest chip maker in the world (read: 6 ETFs Beating the Market Over the Past Year).
Inside Intel Slump
Recently, Apple (AAPL) inked a deal with Taiwan Semiconductor Manufacturing (TSM) in which the latter will produce A-series chips for Apple's iOS devices early next year. This news has negatively influenced the Intel share price as the chances of Intel becoming a contract chipmaker for Apple is less likely.
Further, Intel fell 3.64% in Monday’s trading session due to negative revisions by three analysts. This marks nearly 9% decline since mid June. The analysts are worried that Intel might cannibalize its sales of desktop and laptop microprocessors with the cheaper “Atom” mobile chips.
This could lead to hard times in maintaining the same level of margins in mobile devices. Moreover, the weakening personal computer market trends are weighing on the top line of Intel (read: The Top Choice in the Tech ETF World?).
This chain of negative news in Intel has made trading difficult for semiconductor ETFs over the past week, in particular those with a large exposure to Intel including the following ETFs:
The most popular in the sector, Market Vectors Semiconductor ETF (SMH), lost 2.14% in Monday trading, though it is still up nearly 16% in the year-to-date timeframe. The fund provides concentrated exposure to 26 securities by tracking the Market Vectors US Listed Semiconductor 25 Index.
Intel takes the top position with nearly 20% of assets, followed by Taiwan Semiconductor (13.45%) and Texas Instruments (6.30%). The fund has $263.2 million in its asset base and charges an expense ratio of 35 bps.
The iShares PHLX Semiconductor ETF (SOXX), having amassed $234.8 million, was down 2% in Monday trading. It has nevertheless delivered impressive returns of over 22% so far this year. The ETF follows the PHLX Semiconductor Sector Index and offers concentrated exposure to 31 firms.
Intel takes the third spot in the basket with nearly 7.8% share while the first two spots –Texas Instrument and Applied Materials – do not make up for more than 7.9% share in either case. SOXX does charge a higher fee of 48 bps a year from investors (see more in the Zacks ETF Center).
The other two ETFs – SPDR S&P Semiconductor ETF (XSD) and PowerShares Dynamic Semiconductors Fund (PSI) – with less exposure to Intel, lost 2.21% and 1.12%, respectively, in the rough Monday trading session.
XSD tracks the S&P Semiconductor Select Industry Index and holds 51 stocks in the portfolio. The product provides diversification benefits across each security as no single company takes up more than 3.1% of the assets. The fund has accumulated $63.1 million in AUM and charges 35 bps in fees per year.
On the other hand, PSI follows the Dynamic Semiconductors Intellidex Index. Holding 30 securities, the fund has large exposure to Micron Technology with nearly 6.01% of assets, closely followed by Analog Devices and Applied Materials with 5% share each. The ETF has $16.2 million in AUM and charges 0.63% in expense ratio.
In the year-to-date timeframe, XSD has added 19% while PSI has gained 10.5% YTD (read: Why Semiconductor ETFs Are Crushing the Market).
Although the ETFs have been stressed due to Intel’s sluggish performance, these gained nicely in the year-to-date frame (read: Semiconductor ETFs for 2013?).
The gains could continue moving forward based on some solid trends in the space. Some analysts are expecting global semiconductor sales to continue to rise – even with a decline in PC shipments –given their requirement in the emerging technology applications like tablets and smartphones, so don’t write off semiconductor ETFs just yet.
Still, make sure to pay close attention to the space this earnings season, as it could go either way for this important corner of the market. However, with some strong Zacks Industry Ranks for a number of semiconductor-focused segments, the recent INTC weakness could make this a decent buying opportunity, should firms in this industry live up to their lofty Ranks this earnings season and beat rising estimates, despite the Intel worries.
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