Semiconductor ETF Sees Supersized Outflows

June 20, 2018

Last week, the Van Eck Vectors Semiconductor ETF (SMH) saw net outflows of $721 million—or roughly 45% of the total assets invested in the fund.

The reason is a bit puzzling, considering that other semiconductors ETFs, like the iShares PHLX Semiconductor ETF (SOXX), saw much less movement. SOXX saw outflows of $67 million for the week of June 11-15, while the Invesco Dynamic Semiconductors ETF (PSI) saw no net change in flows. Indeed, the SPDR S&P Semiconductor ETF (XSD) actually gained $7.56 million in new net money.

So what made SMH's week so brutal? The answer is complicated.

SMH Bleeds Cash

Last week's outflows in SMH outpaced those of the largest and oldest fund in the space, SOXX, by more than a factor of 10.

It probably doesn't help that, over the past week, SMH lost 1%, performancewise, while SOXX remained roughly flat. But given that the two are separated by just 0.30% in performance over a one-month period, and that who's on top changes day to day, something else seems to be at work here.

As of June 18, SOXX now has twice as much assets under management (AUM) as SMH, at $1.8 billion. In fact, no other nonleveraged/inverse semiconductor even comes close in size (though the Direxion Daily Semiconductor Bull 3X Shares (SOXL) now stands at $840 million in AUM):

 

Semiconductor ETFs
Ticker Fund Expense Ratio (%) AUM ($M) Spread (%) Net Flows ($M)
SOXX iShares PHLX Semiconductor ETF 0.48 1,830.00 0.04 -67.08
SMH VanEck Vectors Semiconductor ETF 0.35 906.91 0.01 -720.68
PSI Invesco Dynamic Semiconductors ETF 0.63 354.77 0.07 0
XSD SPDR S&P Semiconductor ETF 0.35 346.08 0.06 7.56
FTXL First Trust Nasdaq Semiconductor ETF 0.6 46.82 0.37 0

Sources: ETF.com, FactSet. Data as of June 18, 2018

 

Though both SOXX and SMH are large and popular, investors use the two funds in different ways.

SMH and SOXX are both extremely liquid, yet in practice, SMH edges out SOXX as investors' favored quick-response trading vehicle. SMH trades roughly 10 times the average number of daily shares as SOXX, and with a penny-wide spread. SOXX's spread, meanwhile, is 0.04%.

SMH Closely Tied To Performance

SMH's incredible liquidity means its flows tend to more closely track the day-in, day-out performance of the semiconductor sector, whereas SOXX's assets tend to be stickier and its investors more willing to ride out rough patches.

Take early February, for instance. That's when volatility roared back into the equity markets in a big way, and semiconductor stocks were roiled as a result. Our segment benchmark for semiconductors, the Thomson Reuters US Semiconductors Index, dipped 12% between Jan. 29 and Feb. 9, 2018, only for it to completely rebound by Feb. 28.

On Feb. 8 and 9, as the sector benchmark was scraping its bottom, SMH saw outflows of almost $400 million. Then, as the index began to crawl back up on Feb. 12 and 13, the fund took in $643 million. That's a $1 billion whipsaw in just four days.

SOXX, meanwhile, took in a modest $34 million on Feb. 8 and 9, then another $69 million over the next two trading days. (Its next inflows weren't for another week.)

 

Sources: ETF.com, FactSet. Data as of June 18, 2018

 

Trump Tariffs Trip Up Semiconductors

SMH's utility as a short-term vehicle is likely the reason so many investors dumped it last week, when the Trump administration announced $50 billion worth of new tariffs would be levied on Chinese goods, redoubling fears of a trade war.

Should they go into effect, U.S. semiconductor stocks would be uniquely hurt by these tariffs. Not only would prices rise for Chinese-made components and chipmaking equipment, but U.S. companies might even end up paying the tariffs on their own chips, since Chinese companies handle much of the packaging and quality testing for the chips made stateside.

Though the Thomson Reuters US Semiconductors Index has barely blipped since the tariffs were announced, several individual chip stocks are down, including Intel and Taiwan Semiconductor—which are, incidentally, SMH's two largest holdings (at 9.9% and 8.3%, respectively).

It'll be interesting to see if SMH's flows rebound, however, when Micron, another semiconductor power player, reports its earnings on Wednesday.

Van Eck, SMH's issuer, did not respond to request for comment in time for publication.

Contact Lara Crigger at [email protected]

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