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Mixed Views On A Hot Semiconductor ETF

November 07, 2017: 08:08 AM ET

Semiconductor stocks and the related exchange traded funds surged Monday on news that Broadcom Ltd. (NASDAQ: AVGO) is offering $70 per share in cash and stock for rival Qualcomm Inc. (NASDAQ: QCOM).

On above average volume, SMH gained 1.3 percent to settle at another record high, bringing its year-to-date gain to about 45 percent. The $1.1 billion SMH had a combined weight of 9.5 percent to Qualcomm and Broadcom at the end of the third quarter, according to issuer data.

Although SMH and rival semiconductor ETFs have been among the best-performing, non-leveraged industry ETFs, that isn't keeping some short sellers at bay. In fact, short interest in SMH has been rising, indicating bearish traders that held those positions into Monday were crimped by the ETF's ascent to start the week.

“Nevertheless, short sellers are still flocking to the chip ETF. Short interest increased by 3.7 percent during the last reporting period to 19.77 million shares,” according to Schaeffer's Investment Research. “It would take more than 11 days for these bearish bettors to fully cover their positions, at SMH's average daily trading volume. This is a major source of potential buying power that could enter the market.”

Said another way, if Qualcomm decides to acquiesce to Broadcom, SMH shorts could be skewered. The ETF holds 26 stocks, allocating over 19 percent of its combined weight to Taiwan Semiconductor Ltd. (NYSE: TSM) and Intel Corporation (NASDAQ: INTC).

Rising short interest in SMH isn't the only sign traders are dancing a dangerous dance with semiconductor ETFs. Over the past month, the Direxion Daily Semiconductor 3X Bear Shares (NYSE: SOXS) has averaged daily inflows of over $590,000, according to Direxion data.

SOXS attempts to deliver triple the daily inverse returns of the PHLX Semiconductor Sector Index. That benchmark allocates 15.5 percent of its combined weight to Qualcomm and Broadcom.

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