Semiconductor ETFs And The Tale Of 2 Tech Stories
Summary
- With turmoil in the banking sector spreading to the broader market, many investors are seeking safety in large-cap stocks, including large-cap technology stocks.
- Within large-cap technology, semiconductor stocks have done particularly well.
- At the same time, the current environment doesn’t look as good for early-stage tech companies or technology IPOs.
jiefeng jiang
With turmoil in the banking sector spreading to the broader market, many investors are seeking safety in large-cap stocks, including large-cap technology stocks.
Within large-cap technology, semiconductor stocks have done particularly well as advances in ChatGPT and other artificial intelligence continue to be one of the only bright spots among a banking collapse, interest rate uncertainty, inflation, and large-scale layoffs. This note discusses the good tech story vs. the bad tech story and how semiconductor ETFs fit in.
The Good Story: Relative Safety in Large-Cap Stocks + Innovation in AI
After 2022 erased some of the gains seen in 2020 and 2021, the Technology Select Sector ETF (XLK) is currently up 15.3% YTD as of March 20 compared to the S&P 500 Index, which was up only 3.0%.
With hope for lower interest rates, many investors are seeking safety in large-cap tech companies like Microsoft (MSFT) and Apple (AAPL), which together are over 46% of XLK.
Four out of ten of its top holdings, however, are semiconductor stocks like Nvidia (NVDA), Broadcom (AVGO), Texas Instruments (TXN), and Advanced Micro Devices (AMD).
Semiconductor ETFs have actually been outperforming broader technology ETFs, especially as they benefit from the rapid growth of certain industries like electric vehicles and artificial intelligence like ChatGPT.
The VanEck Semiconductor ETF (SMH), for instance, was up 24.6% YTD, while the iShares Semiconductor ETF (SOXX) was up 23.6% YTD. Both ETFs include large-cap semiconductor stocks mentioned above, like NVDA (up 77.2% YTD), TSM (up 20.5%), and AMD (up 25.9%).
Overall, SMH has an average weighted market cap of $225 billion, and SOXX has an average weighted market cap of $164 billion. (See more about the semiconductor sector here.)
The Bad Story: Tech Layoffs + Uncertainty in Early-Stage Tech Companies
At the same time, the current environment doesn’t look as good for early-stage tech companies or technology IPOs. Silicon Valley Bank (SIVB) was notable for lending to early-stage tech companies, many of which are now struggling to make payroll and looking for a new banking partner.
Additionally, tech layoffs have been dominating the headlines again (even for large-cap companies that tend to have highly cyclical businesses in advertising).
Most recently, Amazon (AMZN) announced that it is cutting another 9,000 jobs on top of 18,000 layoffs several months ago. Meta (META) has also announced a 10,000-person layoff after previously announcing it was cutting 11,000 employees in its first major workforce reduction in the company’s history only a few months ago.
While layoffs and hiring freezes could be part of a bigger strategic plan to turn around an underperforming company, higher profits are not guaranteed. Companies must also make strategic changes in order to increase labor productivity efficiencies - including investing in technology, changing strategic goals, and adjusting client and supplier relationships. Even then, it may take several quarters for efficiencies to be fully realized. (I discuss tech layoffs in a previous note here.)
Bottom Line:
While the overall environment for technology stocks is largely uncertain due to the changing interest rate environment and recent banking crisis, many investors are seeking safety in large-cap tech investments, including semiconductors.
Despite near-term uncertainty in the technology sector, semiconductor ETFs are outperforming broader technology ETFs and are likely to continue to benefit from newer innovations in technology like electric vehicles and artificial intelligence - especially as AI like ChatGPT dominates headlines.
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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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