ETFs to Gain/Lose on Chip Crunch

The COVID-19 pandemic and the resultant work-learn-shop-from-home culture boosted the need for the already in-vogue digitization, accelerating the demand for various products and devices dependent on chips for their functioning. Demand for PCs, smart phones, gaming hardware and consoles increased.

Then there is demand rooting from the electric vehicle and telecom industry. The automotive sector has specifically advanced to include more electronic components in vehicles that rely on chips. Robust recovery in smartphone sales is spurring demand for semiconductors.

Supply chain issues due to the pandemic and lack of investment in chip building capacities amid surging demand causing chip shortages. Dampened by semiconductor shortages, the global smartphone shipments are expected to expand by 6% annually to 1.41 billion units in 2021, down from the earlier forecast of 9% annual growth and 1.45 billion shipments, according to Counterpoint Research's revised estimates.

5G shipments continue to be a key driver of 2021 growth as both vendors and channels focus on 5G devices that carry a considerable average selling price (ASP) than older 4G devices. 5G Smartphones are likely to make up about 35% of total smartphone sales.

No wonder, the industry is currently facing an acute shortage of chips. The chip crisis appears to be like the oil shortage of the 1970s, per a barrons’ article. The delivery time has increased to more than 20 weeks, per Susquehanna Financial Group data in the same article.

Some smartphone OEMs and vendors have reported only 80% of their requested volumes on key components during Q2 2021, and going on further, expect receiving only 70% of their requests. Against this backdrop, below we highlight a few ETF areas that could lose against this backdrop.

Winners

Semiconductor

No wonder, Invesco Dynamic Semiconductors ETF PSI is up about 17% versus about 14% gains in the S&P 500 this year. Even after decent gains, several semiconductor ETFs are slightly cheaper than the Nasdaq 100 ETF Invesco QQQ QQQ which has a P/E of 28.46X and the valuation of SMH has a P/E of 27.02X.

Investors can play SPDR S&P Semiconductor ETF (XSD), Invesco Dynamic Semiconductors ETF (PSI) and First Trust Nasdaq Semiconductor ETF (FTXL). Intel (INTC) and Taiwan Semiconductor Manufacturing (TSM) are some of the stocks that are likely to be the beneficiaries of the trend.

Losers

Tech Companies – Phone Makers  

Apple AAPL will have to slash 2021 iPhone production goals of 90 million handsets by up to 10 million handsets due to extended chip shortages, Bloomberg News reported, citing sources. The iPhone maker reportedly is telling manufacturers that Broadcom (AVGO) and Texas Instruments (TXN) aren't delivering enough semiconductors or components. Apple shares lost about 1.4% after markets on Oct 12. Technology Select Sector SPDR Fund (XLK) has about 20% exposure to Apple shares.

Automotive

Auto bigwigs like Ford (F),Nissan (NSANY),Toyota (TM) and many more are facing production constraints amid shortage of chips. Further production cuts were announced by Toyota lately. Hence, First Trust NASDAQ Global Auto Index Fund CARZ could be in a difficult spot in the coming days.


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