Market Overview

Sizing Up The Sizzle In Semiconductor ETFs

Sizing Up The Sizzle In Semiconductor ETFs
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The technology sector was boosted earlier this week on news of Broadcom Ltd. (NASDAQ: AVGO) looking to acquire rival Qualcomm Inc. (NASDAQ: QCOM). Broadcom, in unsolicited fashion, offered $70 per share in cash and stock for rival Qualcomm with the former showing a willingness to make its offer hostile if need be.

At the time, Broadcom's offer for Qualcomm equaled $103 billion, which would amount to the largest takeover in technology sector history, assuming a deal is reached around that price or higher. Predictably, those headlines were positive for exchange traded funds, such as the VanEck Semiconductor ETF (NYSE: SMH) and the iShares PHLX Semiconductor ETF (NASDAQ: SOXX).

“Year-to-date through November 3, S&P 1500 semiconductor stocks were up 36 percent, while semiconductor equipment stocks were up a whopping 66 percent on strong revenue and earnings growth,” said CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Wednesday. “If the proposed deal were to be completed, it would be among the largest ever in the U.S. technology sector, as the combined entity would have an approximately $190 billion market capitalization.”

Chipping In On Chip ETFs

The $1.2 billion SOXX tracks the widely followed PHLX SOX Semiconductor Sector Index. As of Nov. 7, the ETF had a combined weight of 15.6 percent to Qualcomm and Broadcomm. Intel Corporation (NASDAQ: INTC) and NVIDIA Corporation (NASDAQ: NVDA) are the two largest of the 30 components in SOXX, combining for almost 17.5 percent of the ETF's weight.

Over the near-term, SOXX and rival semiconductor ETFs are likely to feel some impacted as more Broadcom-Qualcomm news is absorbed by market participants.

“CFRA Equity Analyst Angelo Zino, CFA thinks the deal offers significant revenue and cost synergy opportunities, and he sees the proposed deal as highly complementary,” said Rosenbluth. “With robust cash flow generation, he thinks AVGO will be able to deleverage. However, Zino also thinks AVGO will need to increase its offer to get the transaction completed.”

Popular Plays

With the technology sector ranking as the best-performing group in the S&P 500 this year, semiconductor ETFs have been popular destinations for tactical investors. SOXX has seen nearly $92 million in year-to-date inflows while SMH has hauled in almost $534 million in new assets.

“SOXX experienced steady inflows throughout the year, but volume was almost three times stronger than normal on Monday as investors sought to gain diversified exposure to the industry in wake of the proposed Broadcom/Qualcomm deal. SOXX ranks positively to CFRA due to our valuation and risk assessment of the ETF's holdings, bullish technical trends and tight bid/ask spread,” said Rosenbluth.

CFRA has Overweight ratings on SMH and SOXX.

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