US-focused semiconductor ETFs saw a short-term boost in performance last week after US President Joe Biden announced sweeping sanctions on China’s tech industry.
The measures have been described as some of the toughest Biden has taken against China, as the US steps up its efforts to slow the country’s progress as a technology superpower, which include a ban on the export to China of specialist chips and a $50bn investment into the US semiconductor industry.
Leading the way, the VanEck Semiconductor UCITS ETF (SMH) has returned 8.1% over the past week as investors eye a medium to long-term boost for the US semiconductor industry on the back of the sanctions.
Out of the semiconductor ETFs in Europe, SMH has the largest allocation to US companies which total more than 75% of the portfolio. The ETF has seen its performance boosted by US-listed firms in its top holdings including Texas Instruments Incorporated, Applied Materials and Broadcom.
SMH’s closest rival, the iShares MSCI Global Semiconductors UCITS ETF (SEMI) returned 5.5% over the same period, followed by the HSBC Nasdaq Global Semiconductor UCITS ETF (HNSC) at 4.4% and Lyxor MSCI Semiconductors ESG Filtered UCITS ETF (SEMG) at 3.7%.
A note from Bank of America (BofA) said it expects any short-term lost semiconductor sales to China will be offset by higher investment by US chip makers into their manufacturing capacity, boosting its long-term dominance over China.
Andrew Obin, managing director for equity research at the BofA, said: “These rules should be positive, driving higher US capex spend over the medium term, with the potential for near-term lost sales in China.
“Since May 2020, semiconductors have announced plans for $122bn in US capacity additions and we believe these new regulations make the US more attractive for further capacity expansion.”
As well as the US-listed companies, all the ETFs have been boosted by the performance of Europe’s largest chip manufacturer ASML which has seen its share price grow 15.7% over the past week.
The Dutch-based company is not reliant on US technology and has said it will continue to ship its products out of Europe to China despite the latest export controls.
The short-term boost follows a year of dismal performance for semiconductor ETFs, with SMH, SEMI and SEMG returning -41.9%, -42.1% and -45.4% so far this year, as at 24 October.
Despite this, flows have continued to be strong with SEMI recording $139.9m from the start of the year to 18 October, followed by $131.3m inflows for SMH and $10.4m for HNSC, according to data from Bloomberg Intelligence.
Athanasios Psarofagis, ETF analyst at Bloomberg, said: “Given performance has been horrible year to date, investors have been keen to buy the dip. People realise the importance of semiconductors and are betting things will clear up.”
JP Morgan gave the Taiwan Semiconductor Manufacturing Company (TSMC) a buy rating following a dismal year that has seen its share price fall 38.7%, noting a 50% potential upside.
“We believe TSMC is now attractively priced, with the market overly focused on short-term trends inventory cycle, demand weakness, recession risk or on areas with limited earnings impact but higher temporary shock value such as US restrictions on China tech,” JP Morgan said in a note.