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Time to Buy Semiconductor ETFs on Qualcomm-NXP Deal?

Sanghamitra Saha

The semiconductor space is in a great shape lately on decent earnings, consolidation activities and emerging technologies that took an upper hand over the still-subdued PC shipments. To take the winning trend forward, smartphone chipmaker Qualcomm Inc QCOM recently agreed to purchase NXP Semiconductors NV for about $38 billion.

Considering debt, the deal value comes to around $47 billion, as per Reuters. The $110 per share cash offer indicates a premium of 11.5% to NXP's closing price on October 27. The joint entity is expected to generate yearly revenues of over $30 billion, while $500 million in cost savings is likely to be realized yearly within two years of closure. The deal is expected to be sealed by the end of 2017 (read: 4 Best ETFs to Buy for Q4).

This would make the “biggest-ever” semiconductor deal and tag Qualcomm as one of the foremost providers to the rapidly expanding automotive chips market. As per Reuters, with this deal Qualcomm intends to step beyond the otherwise-saturating smartphone market and enter the highly growing area of Internet of Things (IoT).

Via IoT, physical and the digital worlds can be connected. “IoT has enormous potential for data generation across the roughly 21 billion endpoints expected to be in use in 2020” and “by 2022, IoT will save consumers and businesses $1 trillion a year in maintenance, services and consumables,” as per Gartner (read: Invest in the Internet of Things with This ETF).

Market Impact

With the potential to be an integral part of the IoT segment, Qualcomm's shares went up 4.9% in after-hour trading. Qualcomm has a Zacks Rank #3 (Hold) and has a VGM score of ‘B.’ The news should also bolster the semiconductor ETFs with greater focus on Qualcomm (read: Can Semiconductor ETFs Continue Their Rally?).

VanEck Vectors Semiconductor ETFSMH

The fund provides exposure to 26 global securities by tracking the MVIS US Listed Semiconductor 25 Index. Qualcomm occupies the third position with 9.17% of assets. While U.S. firms dominate the fund’s holdings with 68.9% assets, Taiwan (14.8%), the Netherlands (9.5%) and Singapore (5.6%) round off to the top four in terms of country exposure. The fund charges an expense ratio of 0.35%. It has a Zacks Rank of 2 (Buy) with a High risk.

iShares PHLX Semiconductor ETFSOXX

This ETF follows the PHLX SOX Semiconductor Sector Index and offers exposure to 30 U.S. firms. The product charges a higher fee of 48 bps a year from investors. Here, QCOM takes the second spot at 8.37% of total assets. The fund has a Zacks Rank of 1 (Strong Buy) with a High risk outlook.

PowerShares Dynamic Semiconductors Portfolio ETFPSI

This fund tracks the Dynamic Semiconductor Intellidex Index, holding 30 securities in the basket. QCOM occupies the second position and makes up for 5.5% share. It charges 63 bps in annual fees and has a Zacks Rank of 1 with a High risk outlook.

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