Trump’s latest move has yet again shattered the Wall Street, especially the technology sector and worsened the trade spat between the two biggest economies. The Trump administration last week blacklisted Chinese firm Huawei Technologies and 26 of its affiliates, forbidding it from doing business with American companies.
The administration added Huawei to its “entity list”, which means American companies cannot provide tech to Huawei without the government’s permission. Per the Commerce Department report, Huawei is engaged in activities that are contrary to U.S. national security or foreign policy interest. The ban threatens Huawei’s supply chain and could delay the rollout of 5G services around the world. It will also hurt sales of American companies whose revenues are heavily tied to this Chinese equipment maker.
U.S. chipmakers were the worst hit as a number of them have significant exposure to Huawei and are major suppliers to the Chinese firm. According to an estimate from investment bank advisory company Evercore, Huawei — the world’s largest provider of telecom equipment — purchases $20 billion of semiconductors each year (read: Will Semiconductor ETFs Survive the Huawei Ban?).
In particular, Qorvo (QRVO) and Micron (MU) derive about 10%-15% each of its business from Huawei, while Qualcomm (QCOM), Skyworks (SKY) and Xilinx (XLNX) get about 10% of sales each from the Chinese tech firm. Broadcom (AVGO) gets 5% of its sales from Huawei. All these chipmakers will no longer supply Huawei with the components it needs to continue building 5G networks around the world.
Alphabet (GOOGL) suspended its business with Huawei preventing the company from accessing its Android operating system and apps such as Gmail, YouTube and Chrome. Mobile phone parts producer Lumentum Holdings (LITE), which gets nearly 18% of its business from Huawei, also announced the discontinuation of shipments to Huawei and cut its quarterly revenue expectations.
The news pushed the technology ETFs space into deep red over the past week. In particular, Invesco Dynamic Semiconductors ETF PSI, SPDR S&P Semiconductor ETF XSD, Invesco China Technology ETF CQQQ, KraneShares CSI China Internet ETF KWEB and First Trust Nasdaq Semiconductor ETF FTXL stole the show, tumbling more than 5% in a week (see: all the Technology ETFs here).
Below we profile these ETFs in detail and discuss some of the specifics behind their recent slump:
This fund tracks the Dynamic Semiconductor Intellidex Index, holding 29 securities in the basket. PSI has AUM of $179.6 million and sees average daily volume of about 38,000 shares. It charges 61 bps in annual fees and carries a Zacks ETF Rank #3 with a High risk outlook.
This fund tracks the S&P Semiconductor Select Industry Index, holding 34 stocks in its portfolio. It has AUM of $353.2 million and charges 35 bps in fees per year. The ETF trades in average daily volume of 108,000 shares and carries a Zacks ETF Rank #3 with a High risk outlook (read: Top and Flop ETFs So Far in Q2).
The fund follows the AlphaShares China Technology Index, which is designed to measure the performance of the investable universe of publicly-traded information technology companies open to foreign investment, which are based in mainland China, Hong Kong or Macau. It holds about 70 stocks in its basket with AUM of $497 million while charging 70 bps in fees per year. CQQQ trades in solid volume of 237,000 shares and has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
This product provides concentrated exposure to China’s Internet market by tracking the CSI China Overseas Internet Index. In total, the fund holds 54 securities in its basket and charges 70 bps in annual fees from investors. The ETF has AUM of $1.7 billion and trades in volume of around 2.4 million shares per day. KWEB has a Zacks ETF Rank #2 with a High risk outlook.
This fund offers exposure to the 30 most-liquid U.S. semiconductor securities based on volatility, value and growth by tracking the Nasdaq US Smart Semiconductor Index. FTXL has accumulated $32.4 million in AUM and trades in average daily volume of 13,000 shares. It charges 0.60% in expense ratio and has a Zacks ETF Rank #3.
What Lies Ahead?
Despite the slide, the outlook for the sector is quite promising. This is especially true as S&P 500 Technology Sector Index has clearly outpaced the S&P 500 Index from the year-to-date look. In fact, the index has enjoyed a strong rally over the past year despite lingering trade tensions with an annualized return of 7.5% versus 4.7% for the S&P 500 Index (read: 5 Tech ETFs Up About 20% This Year, Still Have Room to Run).
The latest news that the U.S. government has temporarily eased trade restrictions on Huawei will bring some relief to the sector. This is especially true as the U.S. Commerce Department will allow Huawei to purchase American-made goods in order to maintain existing networks and provide software updates to existing Huawei handsets. However, the Chinese tech firm is still prohibited from buying American parts and components to manufacture new products without license approvals.
Further, the sector’s long-term story remains intact with the emergence of cutting-edge technology such as cloud computing, big data, Internet of Things, wearables, VR headsets, drones, virtual reality, artificial intelligence and machine. The deployment of 5G technology — the next wireless revolution — is creating further opportunities. The wave of mergers and acquisitions is also providing further impetus to the space. Moreover, the abovementioned ETFs have a favorable Zacks Rank #2 or #3.
Given the solid long-term outlook but somewhat bearish near-term sentiments, investors may want to stay on the sidelines for the time being. However, risk tolerant long-term investors may want to consider this recent slump a buying opportunity, should they have the patience for extreme volatility.
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