Sudden Shock for Semiconductor ETFs

ETF Trends

Semiconductor stocks and the exchange traded funds that hold those shares have been pillars of strength in the technology sector this year, but that mettle is being tested Thursday.

The Market Vectors Semiconductor ETF (SMH) and the iShares PHLX Semiconductor ETF (SOXX) both entered Thursday with an average 2014 gain north of 22%, but the pair are among the 10 worst-performing non-leveraged ETFs on the day as multiple factors hit the semiconductor complex. [Big Week for This Chip ETF]

Shares of SanDisk (SNDK), which is viewed by analysts and traders as a bellwether chip stock when it comes to gauging consumer electronics demand, are off 12.2% at this writing on volume that is already more than five times the daily average. After the close of U.S. markets Wednesday, SanDisk reported quarterly results that topped Wall Street estimates, but the company’s forward guidance disappointed.

SanDisk, which until Wednesday’s after-hours session was one of this year’s top chip stocks, is a top-10 holding in SOXX, occupying a weight of 4.1% in that ETF. SMH does not hold shares of SanDisk. However, SanDisk is not the only Thursday trouble facing semiconductor ETFs.

Taiwan Semiconductor (TSM), a major components supplier to Apple (AAPL) is pressuring chip ETFs, in particular SMH.

On Wednesday, Morgan Stanley lowered its rating on Taiwanese stocks to equal-weight from overweight while applying the same ratings cut to the country’s semiconductor industry, said Rareview Macro founder Neil Azous in a research note. Maybank lowered Taiwan Semiconductor to sell from hold. As Azous notes, that is the only sell rating on the stock.

SOXX allocates 3.7% to Taiwan Semiconductor, but the stock is SMH’s second-largest holding behind Intel (INTC) at a weight of 15.7%. That is triple the weight SMH allocates to Micron Technology (MU), the ETF’s third-largest holding.

“If it were not for Russian equities falling on account of the new round of sanctions the Taiwan Taiex would be showing the largest negative risk-adjusted return in equities for the second day running. Taiwan Semiconductor closed down 4.6% last night. Taiwan Semiconductor holds a ~12% weight in the Taiex. This is a dramatic fall as it is not considered a high beta stock,” said Azous.

The iShares MSCI Taiwan ETF (EWT) is off 1.1% Thursday, making it one of the worst-performing single-country emerging markets ETFs on the day. EWT came into Thursday with a 2014 gain of 15.2%, but the ETF’s 20.9% to Taiwan Semiconductor and 57.8% to Taiwan’s tech sector are proving too cumbersome for the fund to endure today. [Tech Ties Boost Taiwan ETF]

Market Vectors Semiconductor ETF

 

Tom Lydon’s clients own shares of Apple and Intel.

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