After Astronomical Gains, Semiconductor ETFs Fall Back to Earth

If Sir Isaac Newton had been an ETF investor, his law of gravity would have asserted: What goes up must come down, but will hopefully go right back up again. 

After an astronomical run for semiconductors in which the memory sector fund DRAM rose almost 200% after launch, the sector is coming back down to Earth. Some 14 of the 30 companies in the PHLX Semiconductor Sector index have tumbled 20% or more amid concern that the new Chinese artificial intelligence model Kimi K3 will disrupt the AI market in the US as well as worries about the sustainability of spending in the sector more broadly. But despite the dip, investors are still pouring money into semiconductor ETFs, betting on a rebound, said James Seyffart, Bloomberg ETF analyst. 

“Theoretically, you should view this as healthy,” said Seyffart. “If you look at the performance of anything, there needs to be some sort of pullback. It’s never really one straight line up.”

Chips and Dips

Chipmaker stocks had a rough weekend after Chinese AI company Moonshot unveiled Kimi K3, an open source AI model that performs comparably to OpenAI and Anthropic’s top models at a fraction of the cost. But this isn’t necessarily cause for alarm, Seyffart said. “These are the types of corrections you expect when things get really bubbly.” Semiconductor ETFs’ recent performance is “obviously not good, but it doesn’t matter because they’ve been taking in money pretty handily across the board, particularly some of the levered long exposures.” 

Over the last month, the largest semiconductor ETFs have had steep losses paired with strong inflows: 

• The VanEck Semiconductor ETF (SMH) is down 15.3% but has had $2 billion in inflows, according to VettaFi data. 
• The iShares Semiconductor ETF (SOXX) slipped 18% but brought in $7.2 billion. 
• The Roundhill Memory ETF (DRAM) is down 30.8% but has attracted $10.7 billion in inflows. 

Over in leveraged land, inflows typically pick up when products start performing poorly, said Seyffart. The Direxion Daily Semiconductor Bull 3X ETF (SOXL) is down 51% over the past month, but has brought in $2.6 billion in the same period, $1.4 billion of which was in the past five days alone. “People are trying to call a bottom and try to bet on that short-term reversal,” he said. 

Banking on Memory’s Future: Semiconductor investment is predicated on the theory that memory will continue to play a major role in the AI buildout. With hyperscaler earnings coming out next week, companies will make capital expenditure projections that could affirm investors’ belief in their semiconductor bet, said David Fetherstonhaugh, an investment strategist at VistaShares. “People want to see that number increasing to get conviction that that money is going to flow proportionately to the right semiconductor companies.”