Midterm Results Trigger Record Nasdaq Sell-off, Rattling Chip and AI Funds

Tech funds found themselves drowning in last week’s blue wave. 

The stock market suffered heavy losses last Thursday after Democrats made unexpectedly strong gains in the midterm elections, with tech and AI stocks hit by concerns about an AI build-out slowdown. The Nasdaq composite experienced a record $2.5 trillion drop, and many ETFs were affected. 

“The Nov. 3 result, in our view, creates a thicker veil of policy uncertainty across the entire AI infrastructure value chain,” wrote Denny Fish, head of technology research at Janus Henderson. “Importantly, however, we believe the AI buildout will continue, but the locations in which it will be concentrated, and the pace of the rollout, are now in question.”

Let the Chips Fall Where They May

Chip ETFs fell on Thursday, some in the worst drop since 2020, according to ETF.com. The VanEck Semiconductor ETF (SMH) and the iShares Semiconductor ETF (SOXX) both fell 12%, the Roundhill Memory ETF (DRAM) fell 18% and the Invesco QQQ Trust (QQQ) fell 6.5%. Meanwhile, investors fled to safety in money market funds, adding nearly $118 billion in the week up to Nov. 4, the largest weekly inflow in six months, per Reuters. 

In a sign of market jitters, QQQ and the Direxion Daily Semiconductor Bull 3X ETF (SOXL) both had record trading days, with $80 billion and $25 billion in trading volume, respectively, per Bloomberg data posted on X by the company’s Senior ETF Analyst Eric Balchunas. 

A Port in the Storm: As investors worried about stymied data center construction and slower AI growth, a few issuers positioned themselves to take advantage of a possible increase in credit risk for the industry. Tuttle Capital and Defiance ETFs both filed for several credit default swap ETFs tied to the Mag 7, semiconductors, hyperscalers and companies like Oracle and CoreWeave. The products are designed to gain in value when the creditworthiness of the underlying asset is deteriorating.