Semiconductor ETFs in Focus on Intel Earnings Miss - ETF News And Commentary

Zacks Investment Research
Posted: Jul 18, 2013 5:45 PM

Intel (INTC), easily the biggest and most well-known semiconductor company in the world, reported some sluggish earnings after the bell yesterday. The chip giant revealed that they had earnings of 39 cents a share, missing the Zacks Consensus Estimate by a single penny.

This was pretty disappointing as the company had shown a solid history of beats in the preceding quarters, and the industry was very highly ranked from a Zacks Industry Rank perspective. Plus, semiconductor stocks were largely leading the sluggish tech market lately, so there is concern that their role as a leader may be slipping this earnings season (see 3 Top Ranked Sector ETFs for Earnings Season).

Biggest Concerns

The biggest worries for INTC have to be the uncertain PC market which is seeing reduced shipments, though it still accounts for the majority of the company’s revenues. Additionally, the margins are also a troubling issue for the firm, as gross margins were down over 500 basis points year-over-year, while operating margins declined by over 700 basis points in the same time frame.

Given the poor results and the unfortunate trend on the margin front, some are growing increasingly bearish over Intel’s near term future. This is especially true since the firm expects revenues for the next quarter to be up just 0.3% year-over-year, while margins were guided just a tad lower as well.

Market Impact

The earnings miss and the slightly negative forecast pushed Intel stock down on significant volume for the day, and it also pushed down some other chip stocks as well. In fact, the company saw losses hit the 3.6% mark in midday trading, underscoring the pessimism on this large cap company (read The Top Choice in the Tech ETF World?).

The sluggish trading also had a big impact on semiconductor ETFs which are usually putting big allocations into INTC. In particular, the following semiconductor ETFs were the biggest movers after this key report:

Market Vectors Semiconductor ETF (SMH)

This is easily the most liquid semiconductor ETF on the market, as it has over 1.5 million shares of volume a day. The fund is a bit concentrated though, as the ETF only holds about 25 stocks in its basket.

The top holding is the in-focus INTC though, giving this stock about 18.7% of its assets. Due to this heavy weighting, the ETF was the leader on the downside, losing about 1.6% on the session, and underperforming many other funds for the day.

iShares PHLX SOX Semiconductor Sector Index Fund (SOXX)

This ETF also focuses on the semiconductor market, holding about 30 stocks while tracking the PHLX Semiconductor Sector Index. However, this results in a slightly different exposure profile, with a bit more spread out holdings.

Specifically, INTC only accounts for roughly 7.6% of the ETF, enough to put the company into third place behind AMAT and TXN. Thanks to this, SOXX was flat on the day, easily beating out its more concentrated counterpart for the session.

First Trust NASDAQ technology Dividend Index Fund (TDIV)

Beyond the pure semiconductor market, investors should also note that tech dividend ETFs also saw some weakness on the day thanks to INTC. One such fund that was especially impacted was TDIV from First Trust (see 3 ETFs for Your Portfolio This Summer).

This ETF follows the NASDAQ Technology Dividend Index, and holds about 80 stocks in its basket, holding decent chunks in semiconductors and then software as the two biggest sectors. INTC is the largest of the semiconductor firms in the ETF, accounting for just over 7.8% of the total, helping to push the fund slightly into the red for the day.

Others Worth Mentioning

While cap weighted ETFs took the brunt of the selling pressure, the pain didn’t extend as far into the small and mid cap space. For this reason, equal weight semiconductor ETFs, such as XSD and PSI, were actually up on the day.

After all, these only allocate about 2%-3% to INTC, so a big loss from the company didn’t have a huge impact on these ETFs. Plus, many companies in these ETFs have a focus that goes beyond PCs, so they didn’t see as many industry-related worries either.

Bottom Line

INTC’s report was pretty bad news for the company, pushing the stock down significantly on high volume. The bearishness also caused a slide in broad semiconductor ETFs as more questions are starting to appear regarding some of the key names in the industry (also read Semiconductor ETFs for 2013?).

However, while the news wasn’t great for the space, not all ETFs in the segment were impacted equally. Those that allocate more to some of the other big names in the group were spared, while equal-weight products avoided most of the woes as well.

Given this, you probably shouldn’t write off the entire semiconductor space just yet, but you may want to consider other ways of seeking exposure to the space, especially if current trends—which favor small and mid caps—continue.

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INTEL CORP (INTC): Free Stock Analysis Report
PWRSH-DYN SEMI (PSI): ETF Research Reports
MKT VEC-SEMICON (SMH): ETF Research Reports
ISHARS-PHLX SEM (SOXX): ETF Research Reports
FT-NDQ TECH DIF (TDIV): ETF Research Reports
SPDR-SP SEMICON (XSD): ETF Research Reports
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