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Huge Falls in INTC and NVDA Pull Down Semiconductor ETFs

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Semiconductor ETFs hit by the US-China trade war

The semiconductor industry is vulnerable to the US-China (FXI) trade war, as China is one of its key markets. On May 5, US President Donald Trump warned that he would raise the tariffs on $200 billion worth of Chinese imports from 10% to 25%, and the United States made good on the warning on May 10.

The onset of another round of tariffs sent the iShares PHLX SOX Semiconductor ETF (SOXX) and the VanEck Vectors Semiconductor ETF (SMH) down 8% each between May 6 and 10.

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Holdings of Semiconductor ETFs

Large-cap companies are less volatile than the market and are better positioned to handle macroeconomic and industrial headwinds than their smaller counterparts because of their market leadership. If we look at the top five holdings of SMH and SOXX, each company is a market leader in its segment. For instance, Intel (INTC) is the leader in the PC and server central processing unit markets, NVIDIA (NVDA) in the discrete graphics processing unit market, and Texas Instruments in the analog chip market. These ETFs’ top five holdings make up 40% of their total holdings.

Apple’s suppliers Qualcomm, Broadcom, and Texas Instruments fell in the 6% range between May 6 and 10, as the trade war will likely slow demand in the industrial and smartphone markets. However, the rollout of 5G infrastructure will mitigate the impact of the trade war, so these stocks outperformed SMH and SOXX.

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Intel

Last week was rough for Intel. It fell 12.5% between May 6 and 10, underperforming SMH and SOXX. The stock fell as the company reported a weak outlook for the next three years. This outlook assumes a stable macroeconomic environment. Removing the impact of its outlook, Intel stock was down ~3%.

NVIDIA

NVIDIA stock fell 10% last week, as it’s highly volatile. The stock was affected by weak gaming demand from China and poor guidance from Intel for the data center market. Any stock is sensitive around its earnings date, as traders become active pre- and post-earnings. The current macroeconomic environment and the weak guidances of NVIDIA’s peers have made investors wary about its upcoming fiscal 2020 first-quarter earnings results, which it’s set to release on May 16.

Any unfavorable update on the trade war could send SMH and SOXX down in the mid- to high single digits, pushing semiconductor stocks into another downtrend.

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