Semiconductor ETFs were shaken on Friday after a report from The Wall Street Journal indicated that the Trump administration is likely to reimpose stricter trade restrictions on China, a step that promises to revive the U.S.-China tech skirmishes at exactly the wrong time, as the AI-driven chip rally was taking off.

The report states that U.S. Commerce Department official Jeffrey Kessler warned global chipmakers such as Taiwan Semiconductor Manufacturing Co. (NYSE:TSM), Samsung Electronics and SK Hynix (OTCPK: HXSCF) that their existing waivers, which allow them to run chip factories in China with access to American-made equipment, may be revoked at any time. Although a Commerce Department spokesperson later said that chipmakers can continue to remain in China, the threat’s chilling effect was swift.

TSMC dropped as much as 2.5%, while the Philadelphia Semiconductor Index (SOX) declined some 2%. NVIDIA Corp (NASDAQ:NVDA) dropped more than 1.15%.

Equipment companies were not spared: Applied Materials (NASDAQ:AMAT) lost more than 1.5%.

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ETF Fallout: SMH, SOXX, SOXQ In The Crosshairs

ETF investors weren’t immune to the bloodbath. Large chip ETFs such as the VanEck Semiconductor ETF (NASDAQ:SMH) and iShares Semiconductor ETF (NASDAQ:SOXX) plunged, dragged down by their significant exposures to Nvidia, TSMC, ASML, and other U.S. chip equipment giants.

SMH has more than 21% in Nvidia,11.5% of its holdings in TSMC and substantial positions in both ASML and Applied Materials.

SOXX, which follows the PHLX Semiconductor Index, is also exposed to U.S.-based chipmakers which might feel the downstream effect of tighter curbs.

Looking Ahead: Winners, Losers — And Hedged Plays

The potential policy change also brings new issues for supply chain resilience and whether deglobalization themes will gain momentum. Investors can start rotating into ETFs with greater U.S.-exposure or into funds that track beneficiaries of reshoring, including:

First Trust Nasdaq Semiconductor ETF (NASDAQ:FTXL), which veers towards domestic chipmakers.

Pacer US Cash Cows 100 ETF (BATS:COWZ), now used more as a defensive equity holding that avoids semis.

SPDR S&P Kensho Intelligent Structures ETF (NYSE:SIMS) and others with little China-exposure chip-related holdings.

Conclusion

Although the suggested curbs are not yet agreed and finalized, the reaction in the market highlights how sensitive semiconductor assets are to policy changes. For AI-fueled chip wave ETF investors, this may be a wake-up call, one where geopolitics is as powerful as earnings or the cycle of innovation.

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