Semiconductor stocks are going through a dramatic valuation reset, and for investors who want exposure to the AI trade through ETFs, that raises an obvious question: is this a buying opportunity or a value trap?
The S&P 500 Semiconductors Index's forward price-to-earnings ratio fell to 14.7x on October 30, down from approximately 33x a year earlier, according to LSEG data. That multiple is now below the S&P 500's forward P/E of 18.9x, reversing the premium semiconductor stocks commanded during much of the AI rally.
The correction has hit semiconductor ETFs particularly hard. The iShares Semiconductor ETF (NASDAQ:SOXX) plunged 8.24% on Friday, while the VanEck Semiconductor ETF (NASDAQ:SMH) fell 6.98%. The SPDR S&P Semiconductor ETF (NYSE:XSD) declined 6.30%. For the month of October, SOXX, SMH and XSD lost 17.1%, 14.2% and 14.6%, respectively.
SOXX Vs. SMH: Portfolio Concentration Matters
The selloff also highlights differences in how semiconductor ETFs distribute their exposure.
SOXX has 34 holdings, with Advanced Micro Devices (NASDAQ:AMD) accounting for 9.24% of its portfolio, Intel Corp (NASDAQ:INTC) 6.33%, Nvidia Corp (NASDAQ:NVDA) 7.98%, Micron Technology, Inc (NASDAQ:MU) 7.95% and Broadcom, Inc (NASDAQ:AVGO) 7.58%. Its exposure to Nvidia and AMD makes it particularly sensitive to weakness among these chipmakers. In October, Nvidia retreated more than 10% and AMD 17.5%.
SMH, with 26 holdings, is considerably more concentrated in leading semiconductor companies. Nvidia represents approximately 20.19% of its portfolio, followed by Taiwan Semiconductor Manufacturing (NYSE:TSM) (9.58%), Texas Instruments Inc (NASDAQ:TXN) (5.70%), Broadcom (5.61%) and AMD (5.34%).
This concentration helped SMH outperform SOXX during the October 30 selloff, partly because Intel accounted for just 3.07% of SMH's portfolio.
XSD offers a different approach through a more evenly distributed portfolio. However, its 6.30% single-day decline on Friday demonstrates that diversification within the semiconductor industry cannot eliminate sector-wide risks.
Is the Valuation Reset a Buying Opportunity?
The latest correction followed disappointing guidance from Intel, alongside growing concerns about the sustainability of massive AI infrastructure investments. Intel shares plunged 28.6% on October 30, while AMD dropped 10.9% and Nvidia declined 4.2%.
For SOXX, resistance levels appear to be forming near the $530 mark, according to market data, where the stock has previously encountered selling pressure. If the price can break through this level, it may signal a shift in momentum, potentially attracting more buyers and leading to further gains.
For XSD, support levels appear to be forming around the recent closing price of $452.10, which may serve as a critical point for buyers looking to enter the market. Should the price dip below this level, it could trigger further selling pressure, pushing the ETF closer to the lower end of its 52-week range. Resistance is likely near $471.49, where the ETF has struggled to maintain upward momentum. A sustained break above this threshold could signal a shift in market sentiment and potentially attract more bullish investors.
However, technical indicators suggest that SMH is in a cautious position. While it has shown resilience above the recent support level, the distance to resistance suggests further bullish momentum will require stronger catalysts.
Bottom Line
For semiconductor ETF investors, the decline in forward valuations could present an opportunity if earnings growth remains resilient. However, a lower P/E does not automatically mean stocks are undervalued. Downward revisions to earnings estimates could undermine the apparent valuation discount.
The next catalysts will be hyperscaler capital expenditure plans, semiconductor earnings revisions and demand trends across AI chips, memory and data-center infrastructure.
For SOXX, SMH and XSD investors, the key question is no longer whether semiconductor valuations have corrected, but whether earnings can justify buying the sector at these lower multiples.
