4 ETF Areas Under Watch on Waning Smartphone Demand

Taiwan Semiconductor Manufacturing Co Ltd TSM hit the entire technology industry hard after the company reported Q1 results on Apr 19 before market open. The world’s biggest contract chipmaker, cut its full-year revenue target to the low end of its prior guidance of 10-15% thanks to “softer demand for smartphones and uncertainty in cryptocurrency mining market.”

Management noted that ‘the China market started to pickup in smartphones, but TSMC’s smartphone segment, which is very high end, was softer.” The company’s revenue forecast target for the second quarter came in the range of $7.8 billion to $7.9 billion, falling shy of analysts’ expectation of $8.8 billion.

Notably, TSMC is the world's largest semiconductor foundry company, which makes chips for tech biggies like Apple AAPL (renowned for smartphones) and Nvidia NVDA (beneficiary of the cryptocurrency rally).

TSMC mentioned that there were order cuts from the current Apple iPhone X processor. Management also indicated that continuous feeble demand from the high-end mobile sector may adversely impact the second-quarter 2018 results of Taiwan Semiconductor in spite of strength in cryptocurrency mining.

JPMorgan Chase & Co. analyst Gokul Hariharan estimated that Taiwan Semiconductor’s Apple-oriented revenues may decline about 50%in the second quarter after a 30% decrease in the first quarter. TSMC shares plunged about 5.6% on Apr 19 and 1.5% on Apr 20 while Apple shares lost more than 2.8% and 4.1%, respectively.

Other Evidence of Softening Smartphone Demand

IMF said that the smartphone-driven tech cycle probably had topped in late 2015. And now saturation in demandin developed markets and lengthening of upgrade cycles are weighing on overall smartphone sales.

On a year-over-year basis, Apple logged a decline (5%) in iPhone salesin the fourth quarter of 2017 and Samsung saw a unit decline of 3.6%. IMF even noted that China’s domestic smartphone market shrunk for the first time in 2017.

Bloodbath in Semiconductor Stocks

Taiwan Semiconductor’s guidance cut triggered a selloff in the entire semiconductor space. On Apr 19, Applied Materials Inc. AMAT lost about 6.5%, STMicroelectronics N.V. STM fell about 4.3% and Broadcom Inc. AVGO retreated about 2.7% (read: 5 Reason Why FANG ETFs Lost Their Charm in March).

Against this backdrop, we expect the below-mentioned ETFs to see rough trading in the coming days.

Semiconductor ETFs

VanEck Vectors Semiconductor ETF SMH (down 5.6% in the last two days (as of Apr 20)), iShares PHLX Semiconductor ETF SOXX (down 5.5% since Apr 19) and PowerShares Dynamic Semiconductors ETF PSI (down 5.7% since Apr 19) are likely to be pressured in the near term.

Apple ETFs

ETFs which have a considerable exposure to Apple may also underperform. These funds include iShares U.S. Technology ETF IYW (down 2.8% in the last two days (as pf Apr 20)), Select Sector SPDR Technology ETF XLK (down 2.5% since Apr 19) and Vanguard Information Technology ETF VGT (down 2.6% since Apr 19) (see all Technology ETFs here).

Smartphone ETF

Who can forget the pure-play smartphone ETF, First Trust Nasdaq Smartphone Index Fund FONE? The fund lost about 3% in the last two days (as of Apr 20, 2018).

Taiwan ETF

Pure-play Taiwan ETF, iShares MSCI Taiwan ETF EWT, puts about 22.3% on TSMC. Naturally, the fund lost about 2.7% in the last two days (as of Apr 20, 2018).

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