Tuesday’s ETF To Watch: Merrill Lynch Semiconductor HOLDR (SMH)

by on October 12, 2010 | ETFs Mentioned:

Over the past quarter, a few sectors have stood out as the biggest winners of the summer stock market surge. While materials and service firms were both big gainers, technology companies rose sharply as investors bought up the sector due to its high growth prospects and increasing demand in emerging markets. However, despite these gains in the broad tech sector–which saw Apple and Oracle both surge by more than 17% and Verizon jump by 24.5%–the semiconductor industry experienced weakness as National Semiconductor Corp. plunged by close to 10% while chip giant Intel fell by 6.2% during the period. But these disappointing trends could be reversed later today by a solid earnings report from bellwether Intel (INTC), which would go a long way to stoking the fires of recovery under the struggling segment of the technology market.

The company looks to extend its estimate-beating streak to five consecutive quarters by posting profits better than the current estimate of $0.50 a share on revenues of $11 billion, which compares to profits of just 33 cents a share on $9.39 billion in revenues for the same period last year. While this represents a robust increase, investors will likely focus in on the company’s guidance for the holiday season as well as the company’s plans to tap into the ever-growing mobile computing market. Although demand may be sharply increasing for chips, supply is running dangerously high as well; according to research firm iSuppli, inventory levels of semiconductors currently stands at 75.9 days of inventory, or $34.3 billion worth of chips. If companies cannot find a way to burn this off in the holiday season it could lead to a price way in the first quarter of 2011 which could significantly weigh on Intel’s bottom line in the near-term [see ETFs To Play A U.S. Export Boom].

Investors will also be curious to see how Intel plans to integrate the recently-purchased security software firm McAfee into its operations, so guidance on this item is likely to weigh heavily on INTC as well. This looks to be especially important given the 60% premium that the company paid for the security specialist and the large total cash investment ($7.7 billion) sunk into the company. Many remain skeptical of this deal so a plan for integration will be welcome news among many investors who still question the wisdom of merging these seemingly different businesses together [also read How Google Could Boost The Semiconductor ETF].

Due to Intel’s earnings report, the Merrill Lynch Semiconductor HOLDR (SMH) should be active in Tuesday trading. The fund allocates a robust 21% of assets to Intel while also offering a similar weighting to Texas Instruments and 11% to Applied Materials. Like most HOLDRs, SMH is heavily concentrated with just 18 names in total. The fund experienced extremely weak volume in Monday trading, with the number of shares trading hands off by roughly 33% of the average daily level. That suggests that many traders were waiting until today to make a decision on their semiconductor positions. Should the markets react negatively to the FOMC minutes and if Intel lowers its outlook, look for SMH to be in for a rough day of Tuesday trading [see Five Facts About HOLDRs Every ETF Investor Must Know].

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Disclosure: No positions at time of writing.