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Semis Short-Circuit Tech Funds

With crude oil at a record high, the U.S. dollar being taken out and shot and mortgage insurance companies on the hot seat, I fully expected to be writing about energy, precious metal, or financial funds today. However, the carnage in those sectors was dwarfed by the electromagnetic tsunami hitting technology funds.

The worst-performing technology fund was slammed for 12.73% last week, compared with losses of 7.12% in energy, 5.81% in precious metals, or 7.89% in financials. Aside from the two short funds, only eight of the 152 technology funds we track avoided a down week. The average non-short fund lost 2.33% for the week ending Thursday, Oct. 25.

Nine of the 10 funds on the worst-performer list are either semiconductor funds or electronics funds holding mostly semiconductor stocks. The Ultra Semiconductor ProShares (USD), which is leveraged to twice the Dow Jones U.S. Semiconductor Index, chipped portfolios for 12.73%. At 150% leverage, the (SMPIX) ProFunds Semiconductor UltraSector ProFund (SMPIX) lost 10.34% of its value over the past five trading days.

Two key semiconductor stocks helped induce this short circuit. Altera (ALTR - Get Report) lost one-fifth of its value, down 20.29%, on weaker-than-expected projections for fourth quarter sales. And Broadcom (BRCM - Get Report) shares were walloped for 20.28% when third-quarter profit fell 75%.

It is important to know the industry allocations of the funds you hold to avoid excess concentrations and explain why funds gain or lose value. For example, the (FELAX) Fidelity Advisor Electronics Fund (FELAX) is made up of less than 4% electronics stocks and about 85% semiconductor stocks.

One of FELAX's holdings, SanDisk (SNDK - Get Report), shed 20.25%. The company's latest, ultra-cool product lets you watch computer-downloaded movies and other digital video on your home TV. Unfortunately, SanDisk also announced that it is initiating 25 patent lawsuits. Defending technological innovation can be expensive. Another holding, Nanophase Technologies (NANX), sliced off 24.70% of its value. The company's earnings release proclaimed the 11th consecutive quarter of year-over-year revenue growth without mentioning the 39 consecutive quarters of negative diluted earnings from continuing operations.

Slashing off 8.01% of shareholding value, the iShares S&P GSTI Semiconductor Index Fund (IGW) closely followed its underlying index. The one position causing the most damage was AMIS Holdings (AMIS), off 22.77% as the company's audit committee reviews its inventory cost valuation for impacts on third quarter financial reporting.

Worst Performing Technology Funds
Ranked by returns for the week ending October 25
Fund Ticker Rating Fund Type 1 Week Total Return
Ultra Semiconductor ProShares USD U ETF -12.73%
ProFunds Semiconductor UltraSector ProFund SMPIX E Open-End -10.34%
iShares S&P GSTI Semiconductor Index Fund IGW C ETF -8.01%
SPDR S&P Semiconductor ETF XSD C+ ETF -7.89%
Semiconductor HOLDRs Trust SMH C- ETF -7.82%
Fidelity Advisor Electronics Fund FELAX D Open-End -6.57%
Rydex Series - Electronics Fund RYSIX E Open-End -6.28%
Powershares Dynamic Semiconductors Portfolio PSI D+ ETF -6.26%
Fidelity Select Electronics Portfolio FSELX C- Open-End -6.17%
ProFunds Mobile Telecom UltraSector ProFund WCPIX E Open-End -5.55%
Source: Bloomberg

For an explanation of our ratings, click here .

Traveling at "warp 9" for this short period of time, the UltraShort Semiconductors ProShares (SSG) replicated the 200% opposite of the Dow Jones U.S. Semiconductor Index's daily performance, gaining 14.46% for the week. This fund has still lost money over the last year but works well for catching short-term semiconductor downdrafts.

The other 200% short fund , UltraShort Technology ProShares (REW) added 4.30% by tracking inverse returns of the Dow Jones U.S. Technology Index. Earnings reports and lower estimates of revenue or profits gutted index constituents UTStarcom (UTSI) by 24.43 %, F5 Networks (FFIV) by 20.49% and SAVVIS (SVVS) by 20.40%.

Best Performing Technology Funds
Ranked by returns for the week ending October 25
Fund Ticker Rating Fund Type 1 Week Total Return
UltraShort Semiconductors ProShares SSG U ETF 14.46%
UltraShort Technology ProShares REW U ETF 4.30%
Berkshire Focus Fund BFOCX C Open-End 2.90%
WisdomTree International Communications Sector Fund DGG U ETF 1.79%
Fidelity Select Software & Computer Services Portfolio FSCSX C+ Open-End 1.19%
iShares S&P Global Telecom Sector Index Fund IXP A ETF 0.86%
Wireless HOLDRs Trust WMH B ETF 0.70%
Matthews Asian Technology Fund MATFX B+ Open-End 0.69%
Kinetics Internet Emerging Growth Fund WWWEX D Open-End 0.56%
Kinetics Internet Fund WWWFX B+ Open-End 0.44%
Source: Bloomberg

For an explanation of our ratings, click here .

Today, semiconductors are in everything. Even my toothbrush has one. As orders for chips for new products must be made well in advance, semiconductor orders are a telling sign of business sales expectations. The trouble we are seeing in the semiconductor industry does not bode well for predictions of fourth-quarter GDP.

Kevin Baker became the senior financial analyst for TSC Ratings upon the August 2006 acquisition of Weiss Ratings by TheStreet.com, covering mutual funds. He joined the Weiss Group in 1997 as a banking and brokerage analyst. In 1999, he created the Weiss Group's first ratings to gauge the level of risk in U.S. equities. Baker received a B.S. degree in management from Rensselaer Polytechnic Institute and an M.B.A. with a finance specialization from Nova Southeastern University.

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