Last week, the widely followed PHXL Semiconductor Index slipped nearly 10%. And with the semiconductor industry being one of the primary industries adversely affected by the coronavirus from China, it’s not easy to construct a piece endorsing the related chip ETFs right now.
Even high-quality semiconductor names are being impacted by the coronavirus. Those are the breaks when an industry isn’t just dependent on China and other big Asian markets for production, but as primary end markets as well. Overall, the bottom line is that investors cannot be blamed if they are considering avoiding chip ETFs right now.
That said, an interesting situation could be brewing for chip ETFs. Last Friday was another weak day for stocks, but thanks to a late-day rally, the Nasdaq Composite –home to a slew of marquee semiconductor stocks — eked out a small gain. Additionally, Advanced Micro Devices (NASDAQ:AMD) and Nvidia (NASDAQ:NVDA) posted notable gains on the day, while Intel (NASDAQ:INTC) was one of the less bad names among big-name tech stocks.
Time will tell what last Friday’s price action means. But perhaps it’s time to revisit some of the best chip ETFs available.
So, let’s dive in and take a look at three names.
Chip ETFs to Buy: VanEck Vectors Semiconductor ETF (SMH)
Expense Ratio: 0.35% per year, or $35 on a $10,000 investment
One of the largest chip ETFs, the VanEck Vectors Semiconductor ETF (NASDAQ:SMH) is an interesting case right now and not just because the fund allocates 23.4% of its combined weight to the aforementioned Intel, Nvidia and AMD (in that order).
After getting drubbed in the first four days of last week, SMH was able to piece together a gain of almost 2% last Friday on more than double the average daily. Perhaps more importantly, the fund found support at its 200-day moving average, a level it had not closed below since last June. That could prove to be the start of a near-term recovery for SMH.
Moreover, an integral part of that rebound effort will be Taiwan Semiconductor (NYSE:TSM), which commands 13.28% of SMH’s weight. Risks for TSM are currently twofold: the coronavirus, and its relationship with Huawei — the controversial Chinese mobile phone company that was ensnared it the U.S.- China trade flap.
As will other SMH holdings, TSM will get past the coronavirus issue. But the potential for lost Huawei revenue would be a problem because that’s one of TSM’s largest customers.
SPDR S&P Semiconductor ETF (XSD)
Expense Ratio: 0.35%
On a technical basis, the SPDR S&P Semiconductor ETF (NYSEARCA:XSD) looks somewhat like SMH. Although, XSD violated its 200-day line only to reclaim it during last Friday’s above-average volume rally that saw the fund gain 2.24%.
Unlike rival chip ETFs, XSD isn’t as reliant on a small number of stocks because it’s an equal-weight fund. The fund has 36 holdings, the largest of which is Nvidia at just 3.97%. That means smaller stocks are more prominent in XSD as highlighted by its average market value of $34.7 billion. That’s still large-cap territory, but it’s smaller than what’s found on rival chip funds.
Despite the smaller market capitalization, XSD’s volatility profile is mostly inline with that of SMH and the PHLX Semiconductor Index. Like its rivals, XSD has ample China exposure. But that may not prove to be as bad as expected.
“While most industries have shut down, necessities in the medical, food, and logistics industries have carried on working,” a Technode.com report noted. “Semiconductors are one of the industries that have carried on production—even in Wuhan itself. There couldn’t be more of a striking example as to how important the semiconductor industry is to the Chinese government. It can’t stop for a week, even for covid-19.”
iShares PHLX Semiconductor ETF (SOXX)
Expense Ratio: 0.46%
The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is the chip ETF that tracks the aforementioned PHLX SOX Semiconductor Sector Index. The ETF also allocates over 17% of its weight to Nvidia and Intel. Like rivals SMH and XSD, SOXX generated some intriguing price action last Friday — jumping 2.25% on almost triple the average daily volume while defending its 200-day moving average.
It was less than two weeks that SOXX was hitting all-time highs, confirming that this chip ETF can notch pronounced moves in short time frames. Although volatility has crept higher, there are some reasons to not abandon SOXX and friends; Including Tuesday’s update from the Federal Reserve.
“Today, when rising volatility is met with a policy response, as it tends to be, technology is more likely to outperform,” BlackRock said in a recent note. “Since 2010, in months when volatility rose and financial conditions eased, the median relative return for technology was + 0.38%.”
As of this writing, Todd Shriber did not own any of the aforementioned securities. He has been an InvestorPlace contributor since 2014.