Although tensions between the United States and China over Taiwan are increasing short-term uncertainty for semiconductor exchange-traded fund investors, there is reason to believe that bigger concerns about economic outlook are already priced into shares.
It was only a few months ago that these funds were riding high on a wave of postpandemic demand and a chip supply shortage. That changed as investors began worrying that the Federal Reserve’s war on inflation—sparked in part by the chip shortage that delayed shipments of automobiles and computers—might cause a recession and dent demand for semiconductors.
The three biggest semiconductor ETFs trading on U.S. exchanges—the VanEck Semiconductor ETF (SMH), the SPDR S&P Semiconductor ETF (XSD) and the iShares Semiconductor ETF (SOXX)—are all down more than 20% so far this year.
In recent weeks, these funds began recouping losses and seem to generally have shrugged at this week’s rising worries over Taiwan, where most of the world’s chips are made. It is also home to the biggest fabricator, Taiwan Semiconductor Manufacturing Co. (TSM), which is the top holding in VanEck’s offering.
Recession Bigger Worry Than Taiwan
The semiconductor ETFs haven’t been moving much on the Taiwan noise because investors don’t think a Chinese invasion of Taiwan is probable, Sanjay Devgan, a portfolio manager for the Columbia Seligman Semiconductor and Technology ETF (SEMI), told ETF.com.
“It sounds like it’s a lot of saber rattling,” he said.
Given the lack of meaningful reaction, it seems the deeper issue worrying semiconductor investors is what a U.S. recession would mean for chipmakers and their suppliers, and much of this may already be priced in.
“The most recent downturn was the most pronounced and lengthiest since the financial crisis, so we do think equity markets have baked in a good portion of the risks for 2023,” Angelo Zino, senior equity analyst at CFRA Research, told ETF.com.
“We believe that price leads fundamentals, and the chip industry is among the most forward-looking in nature,” he said. “Often chip stocks are ready to move up as estimates get cut, as they have already been discounted in the shares.”
He expects a mild correction in the semiconductor industry because of slowing demand for PC’s and low-end smartphones, and increasing capacity.
That downturn will likely bottom in the first half of next year, he said, and his longer-term outlook is bright, as demand over the next decade increases along with growth in the data center, automotive and industrial end-markets.
Share Price Rebound Underway
Meanwhile, many semiconductor companies have beaten revenue and earnings expectations recently, underpinning a rebound the PHLX Semiconductor Sector Index has seen in recent weeks, Devgan said.
“My gut tells me the worst is behind us,” he said, noting that eventually, demand for semiconductors will return to the growth trend that the pandemic accelerated as more people work and entertain themselves remotely via the internet.
“Investor fear of the consequences of a recession and rate hikes should already be built into the price of semiconductor ETFs, and, long term, there is a clear trend toward accelerated computing, regardless of the near-term macroeconomic effects,” Richard Gardner, CEO of financial services firm Modulus Global, told ETF.com.