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Huawei Skips US Parts in 5G Base Stations: Chip ETFs at Risk?

Sweta Jaiswal, FRM

Chinese telecom equipment manufacturer giant, Huawei Technologies, has started producing 5G base stations without U.S. parts. The company plans to ramp up production starting October 2019. It had reportedly been testing the base stations in August and September. Per a Reuters article, with regard to the performance of the new 5G base stations, Huawei’s founder and CEO Ren Zhengfei commented that the company “has had positive surprises” and the performance of the base stations were“no worse.”

Zhengfei said that during the initially, the company will be manufacturing 5000 U.S. component-free 5G base stations every month. He plans to increase the annual production to 1.5 million units in 2020. However, the company predicts to make 600,000 units in 2019 including those made with and without the US parts (read: Will Semiconductor ETFs Survive the Huawei Ban?).

The Huawei Ban

On May 15, Trump passed an executive order to declare national emergency. Post the order, the U.S. Department of Commerce announced the addition of Huawei Technologies and its affiliates to the Bureau of Industry and Security Entity List. The order effectively barred U.S. firms from buying or selling any telecom equipment to companies like Huawei, which are deemed to pose a threat to national security (read: Global Stimulus & Huawei Relief Boost Markets: ETFs in Focus). 

Analysts expect the ban to largely impact semiconductor and software companies. In this regard, Chris Caso, a semiconductor analyst at Raymond James, said, “it goes without saying that any such action would be terrible for any Huawei supplier, and for the semiconductor industry at large.”

However, in late-June, the Trump administration urged companies to apply for licenses to supply non-sensitive items to Huawei that can be replaced by foreign competitors.

The Trump administration has been receiving license requests from more than 130 U.S. suppliers, chipmakers, software companies and other firms seeking permission for non-security sales to Chinese telecom equipment manufacturer — Huawei — according to a Reuters report. Moreover, in August 2019, Trump postponed the order to ban U.S. firms from providing supplies to Huawei for the second time since May. The “temporary general license” was stretched for Huawei by 90 days (read: Chip ETFs in Focus as Trump Gets Requests for Huawei License).

Huawei & US Chip Makers

Huawei buys around $67 billion of components every year, including about $11 billion from U.S. suppliers. The company is a key purchaser of chips and a few other components from big U.S. suppliers like Qualcomm (QCOM), Intel (INTC) and Micron Technology, Inc. (MU). Notably, memory chip companies like Micron Technology derive about 13% of revenues from Huawei. Moreover, Qorvo, Inc. QRVO and Skyworks Solutions, Inc. (SWKS) make about 10% of their revenues from Huawei.

Semiconductor ETFs in Focus

Against this backdrop, let’s take a look at some of the semiconductor ETFs facing the trade war heat like iShares PHLX Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH, Direxion Daily Semiconductors Bull 3x Shares SOXL and ProShares Ultra Semiconductors USD.

SOXX

This ETF offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. The fund has amassed $1.78 billion in its asset base and charges a fee of 46 bps a year. It has a Zacks ETF Rank of 2 (Buy) with a High risk outlook (read: ETFs in Focus as Deputy-Level U.S.-China Trade Talks Begin).

SMH

This ETF has AUM of $1.30 billion. The fund provides exposure to 25 global securities by tracking the MVIS US Listed Semiconductor 25 Index. The fund charges an expense ratio of 0.35%. It has a Zacks ETF Rank #2 with a High-risk outlook.

SOXL

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. It has amassed about $630.2 million in its asset base while charging 99 bps in fees per year. It has a High risk outlook (read: 4 Leveraged ETF Areas That Are Up 100% This Year).

USD

This product seeks two times the daily performance of the Dow Jones U.S. Semiconductors Index, charging investors 95 bps in annual fees. It has accumulated $71.8 million in its asset base and has a High-risk outlook (read: Trump Bans More Chinese Tech Companies: ETFs in Focus).