The VanEck Vectors Semiconductor ETF (SMH ) and rival semiconductor ETFs are dealing with the effects the COVID-19 pandemic is having on supply chains and the technology demand, but it’s possible the back half of the year will bring upside for these funds.
SMH, one of the bellwether semiconductor ETFs, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the MVIS® US Listed Semiconductor 25 Index. The fund normally invests at least 80% of its total assets in securities that comprise the fund’s benchmark index. The index includes common stocks and depositary receipts of U.S. exchange-listed companies in the semiconductor industry. Such companies may include medium-capitalization companies and foreign companies that are listed on a U.S. exchange.
“The semiconductor sector spent most of 2019 coming to terms with the uncertainty of a US-China trade war. It will now spend the rest of 2020 reasoning what the fallout from the coronavirus (COVID-19) means for global economic growth and subsequent demand for the semiconductors that power products such as smartphones and laptops. Even at this early stage in the year, the industry’s prediction of modest semiconductor sales growth for 2020 looks unlikely to come true,” according to GlobalData.
What to Watch For
As an industry, semiconductor makers are highly tied to global growth, estimates for which are being ratcheted lower due to the coronavirus. However, many of those trimmed estimates pertain to the first half of this year and if there is pent up demand seeping into the third and fourth quarters.
Over the past decade, semiconductor companies have grown more efficient, reducing costs and increasing production. Chipmakers learned to streamline production and improve their capacity planning and equipment spending. Meanwhile, chip demand surged as the global economy expanded.
“US majors, such as Intel, Qualcomm, and Texas Instruments derive 30% or more of their revenues from China and the market is seen as a major source of potential growth,” said David Bicknell, Principal Analyst in the Thematic Research Team at GlobalData. “The COVID-19 outbreak means US companies’ ambitions will suffer, with little prospect that China’s growth engine will rev up again in 2020. That said, COVID-19 is no sector game-changer. China will continue to make its economy more self-sufficient, driven by domestic consumers buying products designed and made in China. The US industry must face up to the fact that its biggest market will eventually become its biggest competitor.”
This article originally appeared on ETFTrends.com.