US ETFs: Are Semiconductor ETFs good value buys at current levels?

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Semiconductor ETF

Semiconductor ETFs have come under pressure in the last few weeks amid a correction in the broader market as investors remained concerned about the Russia-Ukraine war, and the Fed rate hike, apart from the ongoing semiconductor shortage. Semiconductor ETFs including iShares Semiconductor ETFVanEck Semiconductor ETF and SPDR S&P Semiconductor ETF have plunged up to 25% in the year so far. We take a look at the long-term prospects of these ETFs, and whether they are good value buys for the long-term. 

Semiconductor ETFs: Prospects

Russia-Ukraine crisis adds to semiconductor shortage

  • While the supply of semiconductors was stabilizing after Covid-related disruptions,  the supply chain has once again been disrupted due to the Ukraine crisis. This is on account of supply of two key raw materials — neon and palladium — that are at a risk of being constrained. 
  • According to a report by Moody’s Analytics, Russia supplies over 40% of the world's palladium and Ukraine produces 70% of neon, two key ingredients in manufacturing semiconductors. “We can expect the global chip shortage to worsen should the military conflict persist,” Moody’s noted in its report.
  • Taking from past events, the report noted that during the 2014-15 Crimea invasion, neon prices went up several times over, serving as an indication of the seriousness of the current crisis for the semiconductor industry.
  • In case the semiconductor shortage continues, these ETFs could remain under pressure. 

Positives for the semiconductor ETFs

  • In case the geopolitical situation improves between Russia and Ukraine, the supply chain will stabilize. 
  • While the problem seems to be in the supply side, things look bright from a demand point of view. Robust recovery in smartphone sales is increasing the demand for semiconductors.
  • The rollout of 5G globally has been gaining momentum. By 2025, 5G networks are likely to cover one-third of the world's population, according to industry estimates. The accelerating speed of digitization in various corners like healthcare, transport, financial systems, defense, agriculture and retail has been making the future bright for semiconductors.

Compelling valuations of prominent Semiconductor ETFs

  • The recent fall in the value of these ETFs has meant that SPDR S&P Semiconductor ETF has become attractive from a valuation perspective. The SPDR S&P Semiconductor ETF is trading at a P/E ratio of ~23 times, and is significantly cheaper than the Nasdaq 100 ETF Invesco QQQ which has a P/E of 31.53 times. The S&P 500 has a P/E of 24.21X. 
  • Other semiconductor ETFs like iShares Semiconductor ETF, First Trust Nasdaq Semiconductor ETF, and Invesco Dynamic Semiconductors ETF have a P/E of 32.73X, 24.56X and 28.07X, respectively.

Here’s a brief about some interesting semiconductor ETFs!

iShares Semiconductor ETF (SOXX): The iShares Semiconductor ETF seeks to track the investment results of an index composed of U.S.-listed equities in the semiconductor sector. Top holdings include Broadcom, Qualcomm, Nvidia, Intel and Advanced Microsystems. Due to a very high weightage in tech stocks, it has a higher risk/ reward profile than S&P 500. 

VanEck Semiconductor ETF (SMH): VanEck Semiconductor ETF seeks to replicate the price and yield performance of the MVIS®US Listed Semiconductor 25 Index (MVSMHTR), which is intended to track the overall performance of companies involved in semiconductor production and equipment. 
SPDR S&P Semiconductor ETF (XSD): The SPDR S&P Semiconductor ETF seeks to replicate the total return performance of the S&P Semiconductor Select Industry Index. As opposed to SMH, this is a modified equal-weighted index that provides the potential for unconcentrated industry exposure across large, mid and small-cap stocks. This difference allows investors to take strategic or tactical positions at a more targeted level than traditional sector-based investing.