Semiconductor sector faces downturn, eyes Q3 earnings for potential rebound

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Semiconductor sector faces downturn, eyes Q3 earnings for potential rebound
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The semiconductor sector, represented by stocks and ETFs such as SMH, SOXX, FTXL, and SOXQ, has recently experienced a downturn of 8.8%-10.9% due to higher rate expectations. However, with the onset of the Q3 earnings season, there is potential for a rebound. The sector's performance could be impacted by the earnings reports of key players like Texas Instruments (NASDAQ: TXN ), Intel (NASDAQ: INTC ), Qualcomm (NASDAQ: QCOM ), NVIDIA (NASDAQ: NVDA ), and AMD.

The recent downturn was triggered by factors including reduced data center demand, geopolitical tensions, and US restrictions on China's AI chips and semiconductor equipment access. These challenges led to a $73 billion loss in the PHLX Semiconductor Sector index. Yet, despite these hurdles, the sector could benefit from the ongoing expansion in Artificial Intelligence (AI).

ETFs in this sector hold a Zacks ETF Rank #1 and their performance indicators include Earnings ESP, Zacks Rank, earnings estimate revisions and surprise history (including the earnings surprise track), and release dates.

SMH, a market cap-weighted fund with $9.45 billion AUM, has managed to outperform peer ETFs due to its overweight holding in NVIDIA (NVDA). This differentiates it from other ETFs like XSD and SOXX which have lower NVDA weightings. Despite XSD's diversity, it delivers lower returns due to its lowest yield and highest Beta among the three ETFs.

NVIDIA's domination of the GPU market and its impressive year-to-date performance have significantly boosted both SMH's returns and the overall success of the semiconductor industry. Investors often hold SMH to gain exposure to the "Chip" Market without having to pick individual stocks.

However, for those seeking alpha or industry exposure, direct investment in chip stocks such as NVDA, Advanced Micro Devices (NASDAQ: AMD ), Taiwan Semiconductor Manufacturing Company Limited (TSM), Broadcom (NASDAQ: AVGO ), and GlobalFoundries (NASDAQ: GFS ) could yield greater outperformance, albeit with increased risk.

SMH's beta of 1.53x, while more volatile than the S&P 500 , has doubled the market's returns this year. Meanwhile, NVDA, with a higher beta, has returned 190% year-to-date, making it an attractive alternative for risk-tolerant investors.

The semiconductor industry's cyclical nature means it is heavily impacted by economic changes, and inventory levels can indicate potential slowdowns. However, the AI boom has extended the industry's growth cycle, benefiting companies like NVDA and AVGO. Direct ownership of individual stocks offers potential for better returns compared to broad exposure through ETFs like SMH.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

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