Will Semiconductor ETFs Survive The Huawei Ban?

The ongoing Sino-US trade war has been no less of a ‘tit-for-tat’ game. Ever since President Trump tweeted about raising tariffs on Chinese imports on May 5, there has been series of actions and retaliations. On May 15, Trump signed 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.

Adding to the troubles, Google (NASDAQ:GOOGL) recently blocked Huawei from accessing some updates to the Android operating system. It is being speculated that the latest ban could be to keep Huawei and China from playing a significant role in building next-generation 5G mobile networks.

However, a war takes its own shape, no matter which side wages it. The latest move by Trump will have some damaging impact on Huawei’s business and will also wreak havoc on major U.S. chip suppliers of Huawei. Chip makers derive a large part of their revenues from business with Huawei. In fact, the PHLX Semiconductor Index has lost about 5.2% in the past five days (as of May 17).

Let’s study how ETFs with exposure to these major suppliers are dealing with the latest blow.

What Does the Google Move Mean to Huawei?

According to a BBC article, Huawei’s new devices will be denied access to Google's security updates and technical support. Moreover, the new devices will cease to have apps like YouTube and Maps as well as access to the Google Play store. This move might lead to a loss of market share for Huawei, especially in Western countries.

How Will it Affect Huawei?

The order effectively barred U.S. firms from buying or selling any telecom equipment to firms like Huawei, which are deemed to pose national security risks, virtually crippling its operations. This is likely to deal a serious blow to Huawei as it largely depends on U.S. firms for raw material supplies. Moreover, it derives significant revenues from the U.S. shores by selling finished products in the vast rural markets at a low price.

However, Huawei claims to have been prepping by piling extra components to pass through the supply cut phase. The company has also been creating its own chip technology. However, per a CNBC article, Huawei’s smartphone business will suffer from the ban as the company might not have access to technology or stockpiles in inventory for some exclusive parts needed for the product.

Will Huawei Ban Wreak Havoc on US Semiconductor Industry?

The Chinese telecom equipment manufacturer giant — Huawei — buys around $67 billion of components every year, including about $11 billion from U.S. suppliers. As Huawei enters the Entity List, U.S. suppliers will be mandated to apply for licenses to provide components to the Chinese firm. These licenses are likely to be subject to strict U.S. export control regulations, and companies will need to justify that the transfer of such items will not jeopardize national security, restricting access to them.

Analysts believe that the ban is largely going to impact companies within the semiconductor and software industries. 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.”

A Bloomberg article further stated Morgan Stanley (NYSE:MS) estimates that Qorvo, Inc. (NASDAQ:QRVO) and Skyworks Solutions, Inc. (NASDAQ:SWKS) , which make about 10% of their revenue from Huawei, have lost about 12.3% and 9.9% (as of May 17), respectively, since the ban. Inphi Corporation (NYSE:IPHI) , with sales exposure in the mid-teens to Huawei, lost around 17.2% (as of May 17). Memory-chip companies like Micron Technology, Inc. (NASDAQ:MU) , deriving about 13% of revenues from Huawei, fell 6.4%.

Qualcomm Incorporated (NASDAQ:QCOM) and Broadcom Inc. (NASDAQ:AVGO) are also prominent suppliers to Huawei and have lost around 5.4% and 4%, respectively (as of May 17).

Semiconductor ETFs in Focus

Against this backdrop, let’s take a look at some of the semiconductor ETFs facing the trade war heat. The iShares PHLX Semiconductor ETF SOXX, VanEck Vectors Semiconductor ETF SMH, Direxion Daily Semiconductors Bull 3x Shares SOXL and the ProShares Ultra Semiconductors USD have lost around 2.8%, 2.4%, 8.5% and 5.3%, respectively (as of May 17), since the ban.

SOXX

This ETF offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. Of these, QCOM and AVGO take 11.72% and 8.09% allocation. The fund has amassed $1.55 billion in its asset base and charges a fee of 47 bps a year. It has a Zacks ETF Rank of 3 with a High risk outlook (read: China's Retaliation Puts These ETFs and Stocks in Focus).

SMH

This ETF has AUM of $998.9 million. The fund provides exposure to 25 global securities by tracking the MVIS US Listed Semiconductor 25 Index. QCOM and AVGO take position in the top ten holdings with 6.9% and 5.2% of the assets. While the American firms dominate the fund’s holdings with 79.3% assets, the Netherlands (9.6%), Taiwan (9.4%) and Switzerland (1.7%) round off the top four slots in terms of its country exposure. The fund charges an expense ratio of 0.35%. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook (read: Trade-Sensitive Sector ETFs in Focus on New Tariff Threat).

SOXL

This ETF targets the semiconductor corner of the technology sector with 3x leveraged exposure to the PHLX Semiconductor Sector Index. The fund holds 31 holdings in its basket with QCOM, AVGO, MU, SWKS and QRVO making 12.2%, 8.4%, 3.5%, 2.2% and 1.4% of the total holdings, respectively. It has amassed about $541.6 million in its asset base while charging 99 bps in fees per year. It has a High risk outlook (read: 5 Top-Performing Leveraged ETFs of April).

USD

This product seeks two times the daily performance of the Dow Jones U.S. Semiconductors Index, charging investors 95 bps in annual fees. The fund holds 32 holdings in its basket with AVGO, QCOM, MU, SWKS and QRVO making 12.3%, 10.5%, 4.3%, 1.3% and 0.8% of the total holdings, respectively. It has accumulated $45.1 million in its asset base and has a High risk outlook (read: 4 ETFs to Invest in Soaring Semiconductor Stocks).

Caveat

The Sino-US trade war has been intensifying of late. On one hand, softness in one of Trump's recent rhetorics has imbibed hopes of a truce between the two largest economies. On the other hand, Trump’s move to ban Huawei can ignite another round of retaliation from China. In this scenario, it will be prudent for investors to wait and watch what this clash will unleash.

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