The chip on everyone’s shoulders

The culprit of semiconductor underperformance in 2022 has been supply chain constraints. Notable manufacturers in the U.S. and worldwide have experienced difficulty scaling up production to meet demand, leading to shortfalls for downstream users in the computing, auto, and even appliance industries. On the other hand, Korean manufacturers like Samsung Electronics (SMSN) are reportedly sitting on a stockpile of unsold chips as manufacturing surpasses demand.

This comes despite numerous government incentives investments in semiconductor manufacturing capabilities. The largest chipmaker in the world, Taiwan Semiconductor Manufacturing (TSMC) is slated to increase its capital expenditure in new manufacturing plants and equipment to $44 billion in 2022. Across the equator, U.S. regulators are poised to allocate nearly $50 billion in subsidies, incentives, and rebates for semiconductor manufacturers.

Recessionary fears

Recessionary fears continue to loom over the semiconductor industry. As a sub-sector of the technology sector, semiconductor stocks tend to be high-beta equities, with a strong degree of market sensitivity. Despite chipmakers recording strong sales revenues and positive earnings, the industry has been hard-hit recently by the broad tech sector and growth stock sell-off.

The issue here appears to be one of differentiation. Looming rate increases and drops in consumer demand due to inflation have apparently led to a glut of chips used in electronics like smartphones and laptops. On the other hand, chips used in automobiles remain in short supply, with many customers waiting months for new vehicles to arrive on backorder from assembly lines.

Should recessionary fears manifest in the form of two consecutive quarters of depressed GDP and employment figures, consumer and enterprise demand for electronics is likely to drop further, which would severely impact revenues, cashflow, and earnings for semiconductor companies. As a result, investor sentiment remains fairly negative.</p.

Trading semiconductor stocks

Traders interested in playing the semiconductor industry can opt for two forms of exposure: via single equities or via an exchange-traded product (ETP) that tracks a basket of semiconductor stocks. Both approaches are sensible for long-term buy-and-holds.

The difficulty arises when traders seek magnified or short exposure. This often requires the use of options or a margin account, which exposes traders to a slew of risks. For the former, advanced knowledge of options mechanics is needed. For the latter, the risk of margin calls is ever-present.

The use of leveraged ETPs can solve many of these issues. Like regular ETPs and stocks, leveraged ETPs can be bought and sold on most exchanges in your local currency without the use of a margin account. These ETPs are physically backed, meaning that they are collateralized with the actual underlying shares they offer exposure to, thus negating the need for derivatives.

Leverage Share’s suite of semiconductor ETPs come in both single-stock and index format, with various levels of built-in leverage offering 1x, 2x, 3x, or even inverse (short) exposure.