Michael Barry shorts SOXX: Are the SMH, FTXL, XSD, ETFs at risk?

Michael Burry, who famously predicted the Global Financial Crisis (GFC), has become an active short-seller in the past few years. His activity has had mixed success. For example, he recently placed a short trade on American stock ETFs like the SPDR S&P 500 ETF and Invesco QQQ. 

While this trade was initially successful, the recent surge of US equities has led to a sharp reversal. By the time he exited the position, he was down by about 40%. 

In early 2022, Michael Burry rightly called the top of Tesla stock price. This was a highly successful prediction as the stock plunged hard during the near.

Now, Michael Burry has revealed his latest short. He has placed a short trade on the iShares Semiconductor ETF (SOXX), which tracks the biggest companies in the chip industry like Nvidia, Intel, AMD, Broadcom, and Taiwan Semiconductor.

The SOXX ETF has done well this year, helped by the slow recovery of the semiconductor industry. It has also thrived because of the strong demand for artificial intelligence solutions, which has pushed Nvidia’s market cap to over $1 trillion. In addition, governments are actively making huge investments to shoreup their semiconductor supply. 

Analysts believe that the semiconductor industry has more room to run in the near term. Jim Cramer has become a strong supporter of Nvidia and AMD. Beth Kindig, an analyst who has beaten the likes of Bill Ackman and Ray Dalio, has made the case for Nvidia.

Still, there are some concerns in the semiconductor industry. The biggest one is the future oversupply now that countries like the United States, Japan, and those in the European Union are investing billions in their supply. 

Therefore, these countries will still compete with the likes of South Korea and Taiwan, which will lead to lower prices. Fortunately, the new semiconductor plants will take a few years to come online.

In addition to long-term oversupply issues, Michael Burry likely believes that China will invade Taiwan sooner than expected. Besides, there are signs that western countries are losing momentum on funding Taiwan. An invasion would have immediate impacts since Taiwan is the biggest source of semiconductors.

If Michael Burry’s view on SOXX is correct, it sends a red alert to other semiconductor ETFs. The most prominent ones are the VanEck Semiconductor ETF (SMH)M First Trust Nasdaq Semiconductor ETF (FOXL), and SPDR S&P Semiconductor ETF (XSD). 

These ETFs will drop because of their close correlation with SOXX since they track the same companies. In the case of the Direction Daily Semiconductor Bull 3X Shares (SOXL), it will drop because it does well when chip stocks are in an uptrend.