The VanEck Vectors Semiconductor ETF Is Watching Trade War Rumors
I picked this as my best ETF for 2018 and through the first quarter of the year it is up 7%. That’s easy to do when your holdings include Nvidia Corporation (NASDAQ:NVDA) and Lam Research Corporation (NASDAQ:LRCX). The tech slam of March 27 hit the group hard, however, and no sector is as dependent on free trade. Semiconductors are mostly made in Asia with American intellectual property and equipment.
Companies like Lam provide the equipment, companies like Nvidia provide the designs, and companies like Taiwan Semiconductor Mfg. Co. Ltd. (ADR) (NYSE:TSM) provide the land and labor. It would take years for this sector to adjust to tariffs, and America’s position in the industry would be at risk if a trade war broke out.
Remember, however, that in my original article about this ETF I called this a long-term call. The beauty of an ETF is that it’s aimed at sectors, not nations. If Chinese companies come to dominate the semiconductor business because they control production, an ETF like this is designed to automatically rotate into those stocks. The managers aren’t picking stocks. They are picking an industry and letting the market pick stocks.
Thus, as a company like Qualcomm, Inc. (NASDAQ:QCOM) loses ground after its merger with Broadcom Ltd (NASDAQ:AVGO) is broken up by the government, its weighting in the ETF is reduced. SMH is tracking the MVIS US Listed Semiconductor 25 Index, so as the weights of stocks within the index rise and fall, the fund is matching the moves.
A stock picker would operate differently. Right now, I’d probably be grabbing Qualcomm because it’s cheap, and I might be dumping Nvidia because it’s dear. An ETF doesn’t operate that way. It merely follows the index, and the weighting of companies within the index, buying what’s rising and selling what’s falling. The question for this quarter is whether the Trump Administration is serious about a trade war with China, and how that might impact the semiconductor industry as a whole.
If it is serious, as I noted, there could be rough times ahead, at least for a while. Trade wars are bad for companies and other living things. Tariffs raise prices by raising costs and cut demand. Much of how you should deal with the SMH ETF in the short term depends on your own investment time horizon. I’m 63. I can’t wait out a trade war. If you’re 36, you can, and you should. Demand for what chips do is going to continue to grow on a global scale, and the U.S.
If we let the Chinese take the market by getting into a fight against factories they own, they’ll find other buyers. But in the end, SMH should be fine. Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.
2019 could easily hit a five-year low if plantings are reduced and if there’s a late start to the season amid adverse weather in the corn belt. On the flip side, weighing on the complex more recently was news that China could slap tariffs on U.S. U.S. announced against Chinese products.
If the tariffs go through, they would mean "surplus soybeans, and lower soybean prices in the U.S.," Tobin Gorey, director of agricultural strategy at Commonwealth Bank of Australia, told Reuters. Another commodity for which lower prices could make an appearance is cocoa. Prices for the bean are up the most of any commodity so far in 2018, but a lot of that is simply because they went too low last year, reaching a 10-year trough.
