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Semiconductor ETFs Showing Sensitive Side to Trade Wars

This article was originally published on ETFTrends.com.

The sensitivity of semiconductor exchange-traded funds (ETFs) to trade wars was evident in funds like the VanEck Vectors Semiconductor ETF (SMH)  and the iShares PHLX Semiconductor ETF (SOXX)  as U.S.-China trade deal news continued to keep markets guessing.

SMH, in particular, lost 6 percent last week. Despite this, all in all, both funds are outperforming all three major indexes with SMH up 33.19 percent and SOXX up 35.20 percent year-to-date.

The semiconductor sector can certainly lay blame on the recent trade war news. China responded to the latest tariff threats by U.S. President Donald Trump by promising to take “necessary countermeasures” if the Trump administration followed through on its threat to increase tariffs on Chinese goods, which it did on Friday.

China’s Commerce Ministry said that it will make retaliatory moves if U.S. tariffs on $200 billion of Chinese goods are increased to 25% from 10% as promised by the Trump administration.

"Undoubtedly the semiconductor industry is a key factor underlying the US-China trade war," wrote Rodney Chan of DIGITIMES. "However, when we try to understand the strength and progress of China's semiconductor industry, we discover that all the figures seem connected and yet cannot be compared directly.

"The production value of the wafer manufacturing industry should not be combined with that of IC design, as the two sectors have completely different business structures. Reading the semiconductor industry's figures is like viewing a country's budget plan, both filled with hidden, curious and unanswerable parts."

SOXX seeks to track the investment results of the PHLX Semiconductor Sector Index composed of U.S. equities in the semiconductor sector. The fund generally invests at least 90% of its assets in securities of the underlying index and in depositary receipts representing securities of the underlying index. The underlying index measures the performance of U.S.-traded securities of companies engaged in the semiconductor business.

SMH seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Listed Semiconductor 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor sector. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.

"Semis are starting to roll over. Technology is definitely showing some outflows," said Mark Newton, technical analyst at Newton Advisors. "For me that signals people are exiting technology and it's really not the right place to be."

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