The semiconductor space is witnessing consolidation. Notably, Nvidia NVDA agreed to acquire UK-based chip designer Arm Ltd from Japan’s SoftBank Group Corp for as much as $40 billion after weeks of speculation. It will represent the biggest acquisition in the history of the semiconductor industry (read: ETFs to Watch Post Stellar Q2 Earnings From Nvidia).
Deal in Focus
Per the terms of the deal, Nvidia will pay SoftBank $12 billion in cash, including $2 billion payable at signing of the agreement, and 44.3 million Nvidia shares worth an estimated $21.5 billion. Following the closing of the transaction, Nvidia intends to retain the name and strong brand identity of Arm and expand its base in Cambridge. Arm’s intellectual property will remain registered in the United Kingdom.
The combination will create a company well positioned for the age of artificial intelligence (AI). This is because the deal will bring together Nvidia’s leading AI computing platform with Arm’s vast ecosystem to create a premier computing company for the age of AI, accelerating innovation while expanding into large, high-growth markets. The acquisition will improve Nvidia’s competitive position against rivals such as Intel INTC and Advanced Micro Devices AMD in the data-center chip market.
Notably, Arm has unparalleled reach as a supplier of designs and intellectual property to most of the global semiconductor industry, licensing its technology to customers such as Intel, Qualcomm QCOM and Samsung Electronics Co Ltd who increasingly compete with Nvidia (Read: 4 Robotics ETFs to Buy as AI Tightens Grip Over All Spheres of Life).
The transaction, which has been approved by the boards of directors of NVIDIA, SoftBank and Arm, is expected to be immediately accretive to its non-GAAP gross margin and non-GAAP earnings per share. It is subject to customary closing conditions, including the receipt of regulatory approvals from United Kingdom, China, the European Union and the United States. Completion of the transaction is expected to take place in approximately 18 months.
However, analysts believe the deal will likely see strong opposition from Nvidia’s chip industry rivals with murmurs of protest emerging in South Korea and China within hours of the deal’s announcement.
Market Impact
Following the merger announcement, shares of Nvidia gained 6.3% in pre-market trade. The news has put the spotlight on some ETFs, which could be the best ways for investors to tap the opportunity arising from the proposed Nvidia deal. Investors should keep a close eye on the movement of these ETFs over the coming weeks.
VanEck Vectors Semiconductor ETF SMH
This ETF has AUM of $2.5 billion and average daily volume of about 2.9 million shares. The fund provides exposure to 25 global semiconductor securities by tracking the MVIS US Listed Semiconductor 25 Index. NVIDIA occupies the second spot with 10.4% of the assets. While the American firms dominate the fund’s holdings with 75.2% the assets, Taiwan (13.8%), the Netherlands (8.6%) and Switzerland (2.4%) capture the top four slots in terms of country exposure. The fund has an expense ratio of 0.35%. It has a Zacks ETF Rank #2 (Buy) with a High risk outlook.
iShares PHLX Semiconductor ETF SOXX
This ETF offers exposure to 30 U.S. companies that design, manufacture and distribute semiconductors by tracking the PHLX SOX Semiconductor Sector Index. Of these, Nvidia takes the second spot with 9.5% share. The fund has amassed $3.5 billion in its asset base and charges a fee of 46 bps a year. It trades in a solid volume of 586,000 shares and has a Zacks ETF Rank #1 (Strong Buy) with a High risk outlook.
Global X Robotics & Artificial Intelligence ETF BOTZ
This fund follows the Indxx Global Robotics & Artificial Intelligence Thematic Index, which seeks to invest in companies that potentially stand to benefit from increased adoption and utilization of robotics and AI, including those involved with industrial robotics and automation, non-industrial robots, and autonomous vehicles. It holds 31 stocks in its basket with NVIDIA occupying the top spot with 9% holding. The ETF has AUM of $1.7 billion and average daily volume of 908,000 shares. It charges 68 bps in annual fees.
VanEck Vectors Video Gaming and eSports ETF ESPO
This fund offers exposure to global companies, involved in video game development, e-sports and related hardware and software by tracking the MVIS Global Video Gaming and eSports Index. Holding 25 stocks in its basket, NVIDIA takes the top spot with 9.1% share. American firms account for one-third of the portfolio, while Japan and China round off the next two spots with double-digit allocation each. The fund has gathered $466.2 million in its asset base while trading in average daily volume of 197,000 shares. It charges 55 bps in annual fees from investors (read: Is it the Right Time to Pick Video Gaming ETFs? Let’s Explore).
Pacer BioThreat Strategy ETF VIRS
This fund seeks to invest in U.S.-listed companies whose products or services help to protect against, endure or recover from biological threats to human health. It tracks the LifeSci BioThreat Strategy Index, holding 45 stocks in its basket. Nvidia occupies the top position with 7.9% of assets. The ETF has accumulated $5.4 million in its asset base and charges 70 bps in annual fees. It trades in average daily volume of 8,000 shares.
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