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Semiconductor stocks and exchange-traded funds (ETFs) that focus on chip shares continued to struggle in June. Now, as a new earnings season begins, investors are wondering if semis can break that trend and start a much-awaited bull run.
2022 has so far brought numerous headwinds to the chip industry. Data provider TrendForce recently highlighted:
“The overall consumer demand has weakened rapidly due to recent events such as the Russia-Ukraine military conflict and the COVID-19 lockdown in Shanghai.”
As a result, the widely followed Philadelphia Semiconductor Index lost about a third of its value year-to-date (YTD). Yet, last week Samsung Electronics (KS:005930) issued robust Q2 pre-earnings guidance. Wall Street was pleased with the numbers and noted strong sales in memory chips.
Samsung will announce full earnings on July 28 as investors now wonder if other chip heavyweights may also release favorable metrics in the weeks ahead to help end the downward trajectory in share prices.
Despite recent setbacks, the outlook for the industry remains strong. The US Semiconductor Industry Association (SIA) reminds us that semiconductors are used in virtually every modern technology. Readers may also be interested to know that China is the largest consumer of chips.
With that information, here are two semiconductor ETFs to buy in Q3:
Our first fund, the VanEck Semiconductor ETF (NASDAQ:SMH), currently invests in 25 leading chip companies. The ETF was first listed in December 2011 and has $6.2 billion in net assets. Recent metrics highlight that in 2022 global semiconductor revenues should exceed $660 billion, up 13.7% year-over-year (YoY).
Close to 60% of the portfolio is held in the top 10 stocks. Thus, SMH is a highly concentrated fund.
Among the leading holdings are Taiwan Semiconductor Manufacturing (NYSE:TSM), NVIDIA (NASDAQ:NVDA), Texas Instruments (NASDAQ:TXN), Qualcomm (NASDAQ:QCOM), Intel (NASDAQ:INTC), and ASML (NASDAQ:ASML).
With a market share of well over 50%, TSM is the largest chip manufacturer globally. Therefore, analysts pay close attention to its quarterly earnings, expected on July 14.
Meanwhile, the US recently passed the CHIPS for America Act to improve the competitiveness of US firms in the industry. Put another way, the share of US-based chip names will likely increase in the coming years.
SMH hit a record high in November 2021. Yet, the fund is down 32.4% YTD.
The semiconductor industry is highly cyclical, and potential downturns in the industry would be important to watch. However, following the recent decline, which brought valuations more in line with historical metrics, we are bullish on many robust chip shares and believe SMH deserves readers’ attention.
Next up is the SPDR S&P Semiconductor ETF (NYSE:XSD), an equal-weighted fund that gives access to 40 chip names. The ETF was launched in January 2006.
XSD tracks the S&P Semiconductor Select Industry Index. The top 10 stocks comprise close to 29% of $951.7 million in net assets.
Among them are Impinj (NASDAQ:PI), First Solar (NASDAQ:FSLR), Qualcomm, Lattice Semiconductor (NASDAQ:LSCC), Qorvo (NASDAQ:QRVO), and Wolfspeed (NYSE:WOLF). We should note that all the names in XSD are US-based chip companies. Thus, industry heavyweights like TSM or ASML are not on the roster.
XSD saw an all-time high in early January. But since then, chip names in the fund have come under pressure, leading to a loss of over 35%.
Trailing price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 14.79x and 3.14x. Readers who want to bet on the semiconductor industry through an equal-weighted fund this earnings season should research XSD further.
Disclosure: Tezcan Gecgil, Ph.D., does not have Hold positions in either SMH or XSD.
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