Semiconductor ETFs Surge on Broadcom Buyout Talk - ETF News And Commentary

The semiconductor space is consolidating rapidly with a number of deals announced this year.
Rising costs and anemic revenue growth are pushing the large chipmakers to combine. Further, rising demand for low-priced chips and new products to power Internet-connected gadgets is driving consolidation in the industry.

The latest catalyst is Avago Technologies (AVGO), which is in talks to buy fellow wireless chipmaker Broadcom (BRCM) in a deal worth about $35 billion, as per the report from the Wall Street Journal. The discussion is in its advanced stage and could come through as early as this week, though it also has chances of falling apart (read: Beyond XLK: 3 Great Tech ETFs).

Singapore-based Avago has been at the forefront in the wave of mergers and acquisitions over the past several months. The rumored acquisition could expand Avago’s communications-focused revenue stream as Broadcom is a leading player in supplying various kinds of chips used in the latest networking devices. In fact, BRCM dominates about half of the world’s tablets and smartphones market, according to Bloomberg. Further, the deal could bolster the competitive position of the company relative to Qualcomm (QCOM) and Intel Corp. (INTC).

Broadcom’s revenues were higher than Avago last year, with $8.4 billion generated by the former compared with its potential acquirer's $4.9 billion. However, Broadcom is struggling to gain market share from Qualcomm in modem chips used for mobile phones that has compelled it to shut down the unit with substantial layoffs. So, it is logical for the chipmaker to get acquired.  

The in-focus deal, if announced, would be the biggest acquisition in the $300 billion semiconductor industry, according to Bloomberg. It would be almost double the size of NXP Semiconductors’ (NXPI) pending acquisition of Freescale (FSL), announced in early March (read: Nasdaq Hits 5,000 on Tech Mergers: Semiconductor ETFs Surge).

Market Impact

Shares of BRCM jumped as much as 22.6% following the news to more than the 14-year high of $57.70. The stock also crushed its average volume figures, as more than 61.1 million shares moved hands compared to just 7.1 million on average. Meanwhile, Avago shares also surged as much as 10.3% to a new high of $144.82 on elevated volume of nearly five times the daily average volume.

After the solid run-up, Broadcom and Avago market capitalization is currently $34.2 billion and $36.3 billion, respectively. Both stocks have a favorable Zacks Rank. Broadcom sports a Zacks Rank #1 (Strong Buy) and Avago holds a Zacks Rank of 2 (Buy) (see: all the Technology ETFs here).

The possible buyout deal also led to smooth trading in the semiconductor ETF world with all the four non-leveraged funds gaining nearly 4% on the day. This trend is likely to continue if the deal is signed and investors could definitely tap this opportune moment of the surging trend in the space through the following ETFs. Any of these funds could make for a compelling choice given their Zacks ETF Rank of 1 or ‘Strong Buy’ rating, suggesting their continued outperformance.

Market Vectors Semiconductor ETF (SMH)

This fund provides exposure to 26 securities by tracking the Market Vectors US Listed Semiconductor 25 Index. Of these firms, Broadcom and Avago are among the top 10 holdings accounting for over 4% each. From a market cap look, the product focuses on large cap stocks, as these make up for 80% of the portfolio. The product manages assets worth $471.4 million and charges 35 bps in annual fees and expenses. It is heavily traded with around 3.2 million shares exchanging hands daily.

iShares PHLX Semiconductor ETF (SOXX)

This ETF follows the PHLX Semiconductor Sector Index and offers exposure to 30 domestic firms. Avago takes the fourth spot in the basket with nearly 6.9% share while BRCM is the ninth firm with 4.1% share. More than three-fifths of the portfolio is dominated by large cap stocks while mid caps takes the remainder with just 3% going to small caps. The fund has amassed $468.2 million in its asset base and trades in solid average volume of roughly 254,000 shares a day. The product charges 47 bps in fees a year.

SPDR S&P Semiconductor ETF (XSD)

This fund tracks the S&P Semiconductor Select Industry Index, holding 48 stocks in its portfolio with none accounting more than 3.28% of total assets. Here, BRCM and AVGO occupy the eleventh and twelfth position respectively in the basket with 2.6% allocation each. The product has a definite tilt toward small cap stocks at 54%, followed by 27% in mid caps and 18% in large caps. The fund is less popular and illiquid with AUM of $186.4 million and average daily volume of about 94,000 shares. It charges 35 bps in fees per year (read: Chipmakers Q1 Earnings Fail to Fuel Semiconductor ETFs).

PowerShares Dynamic Semiconductors Fund (PSI)

This fund tracks the Dynamic Semiconductor Intellidex Index and holds 30 securities in the basket with a diversified exposure to various market caps. About 46% goes to small caps, 36% to large caps and the rest to mid caps. Broadcom occupies the second spot with 5.9% share. The product, with AUM of $84.3 million, is often overlooked by investors and hence sees a lower average daily volume of under 45,000 shares. Expense ratio came in at 0.63%.

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AVAGO TECHNOLOG (AVGO): Free Stock Analysis Report
 
BROADCOM CORP-A (BRCM): Free Stock Analysis Report
 
MKT VEC-SEMICON (SMH): ETF Research Reports
 
ISHARS-PHLX SEM (SOXX): ETF Research Reports
 
SPDR-SP SEMICON (XSD): ETF Research Reports
 
PWRSH-DYN SEMI (PSI): ETF Research Reports
 
QUALCOMM INC (QCOM): Free Stock Analysis Report
 
INTEL CORP (INTC): Free Stock Analysis Report
 
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