SMH, SOXQ: Since Macro Trumps Micro, Size Doesn't Matter

Summary

  • Over the past decade, everybody and their mother have been buying semiconductor ETFs, leading to exponential AuM growth in this hot industry.
  • The greater the importance of semiconductors and the more fierce the economic (and political) battle between the US and China - the more noise and regulation the industry suffers from.
  • SMH is the largest semiconductor ETF, with a non-US touch, and the obvious pick for most investors who are looking to have long exposure to this hot industry.
  • SOXQ is the smallest semiconductor ETF, with a more US-focused approach. It's way younger but also cheaper and yielding more than SMH, making it a worthwhile-examining contender.
  • There are more and more clouds floating in the semiconductor skies and they seem as dark/scary as they looked ahead of previous major global economic slowdowns.
  • This idea was discussed in more depth with members of my private investing community, Wheel of Fortune. Learn More »

Main microchip on the motherboard

sankai

All Eyes Are on Semiconductors

Semiconductors is one of the industries that attract the most attention from investors and decision-makers alike.

On one hand, chips have become an essential part of every innovative product that comes to the market, ranging from

Shortage of chips immediately translate into severe delays along the supply-chain, hurting manufacturing, production and delivery times of a long list of products.

Bloomberg

US Export Control - Impact And Opportunity For China's Semiconductor Industry

Bloomberg

semiconductors have become one of the most closely-watched and closely-supervised/regulated industries, functioning as a barometer for both the economic as well as the political playing fields.

Bloomberg

In-spite of the very rough patch these ETFs are going through over the past year, they still manage over $20B in AuM, out of which nearly 90% (~$18B) is concentrated in the top-3 ETFs.

Y-Charts

Chart
Data by YCharts

the average current volatility of a semiconductor ETF is close to 50%, significantly higher than blue chips (DIA's 20%), large-caps (SPY's 27%) and even big tech (QQQ's 36%)

Y-Charts

Between Mar. 23, 2020 (market bottom) to Dec. 27, 2021 (market peak): - Absolute total returns

Y-Charts

returns since Dec. 27, 2021 - Absolute total returns:

Y-Charts

So far in 2022, SOXQ has performed in line with ^SOX (slight outperformance for the former) but it has underperformed SMH by ~1.8%.

Y-Charts

Gloom Hanging Over Chip Stocks Met by Growing Chorus of Optimism

Bloomberg

Chart
Data by YCharts

Chart
Data by YCharts

Bloomberg

Bloomberg

the most recent data is already putting global semiconductor sales at negative Y/Y territory, something that coincided with previous severe economic downturns.

WSTS

Use the Correlation Between the Economy & Stock Market to Your Advantage

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Disclosure: I/we have a beneficial long position in the shares of WHEEL OF FORTUNE'S FUNDS MACRO PORTFOLIO ("FMP") either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Short SOXL (hedge)

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