A Simple Rule for the Semiconductor ETF: Buy After a 15% Drop. Here's How It Has Done Since 2012.

The VanEck Semiconductor ETF (NASDAQ:SMH) had its highest close yet, $668.91, on June 22. Under four weeks later, on July 17, it closed at $556.53 -- its first close at least 15% below that peak. As I write, the chip fund is around $565, about 15% below its record and close to where it closed on July 17.

That July close triggered a simple rule worth testing. Buy the fund on the first day it closes 15% or more below a record, and hold it for a year.

I checked the rule against the fund's daily closing prices since the start of 2012 (dividends left out), counting one signal per drop and resetting every time the fund hit a new high. Eight signals have had a full year to play out. Seven of them finished the next year with a gain.

Image source: Getty Images.

Seven gains from eight signals

The gains were mainly big ones. The table below compares every signal's close to the fund's first close a year later.

Data source: Yahoo Finance. Calculations by author.

The March 2020 signal did best, at around 89%. And even the two lowest gains, from the March 2021 and July 2024 signals, made for good years of about 14% and 22%.

Still, the rule rarely nailed the bottom. In five of the eight cases, the fund dropped around 10% or more below the signal price before it turned higher.

An investor who bought on the July 2024 signal, for example, was down about 24% by April 2025. And the investor still ended the year up around 22%.

2022 was different

The only loss came from the signal on Jan. 25, 2022. One year later, the fund was down around 10%, and that understates how rough the slump got. The fund kept dropping until October 2022, when it closed about 45% under its December 2021 record. It didn't close above that old high again until July 2023.

The Federal Reserve began hiking interest rates in March 2022, which can weigh heavily on growth stocks like chipmakers. And demand for chips cooled at the same time.

In September 2022, memory chipmaker Micron Technology (NASDAQ:MU) posted revenue of $6.6 billion for its fiscal fourth quarter of 2022 (the period ending Sept. 1, 2022), down 20% year over year.

Its net income shrank around 45% from a year earlier, and management blamed quickly weakening consumer demand and customer inventory cuts.

Micron also predicted PC unit sales would fall by about a mid-teens percentage in 2022, and it said it'd make big cuts to its capital spending in fiscal 2023.

So, the 2022 slide arguably reflected a real slowdown in the chip business -- not just worried investors.

I don't see that sort of slowdown now. Global semiconductor sales hit $159.7 billion in August, up 144% year over year, according to the Semiconductor Industry Association. (The group's monthly numbers are a three-month moving average.)

Yes, a boom that fast can reverse, and memory prices in particular can swing hard. But the August numbers don't show anything like the demand slump Micron described in 2022.

Is the rule better than buying any day?

Likely not, at least judging by the fund's history. Buying on any trading day since the start of 2012 and holding for a year would have put an investor ahead around 82% of the time, with a median one-year gain of about 29%. The eight signals led to a median gain of about 29%, too.

This suggests most of the rule's success came from owning a fund that climbed in most years anyway. Sure, the 15% drop didn't hurt, but it didn't help much either.

What the rule does give is a reason to buy when holding chip stocks feels worst, and a fair warning of what can come next. The July 17 buyer is a good example. The fund slid to $504.22 on July 29, around 9% below the signal price, then rose to $633.90 on Oct. 5. But the fund lost that gain in October, and it now sits near where that investor began, with the one-year point still around nine months away.

Is the July signal a reason to buy? I think the fund is worth considering at this price, best bought in stages as part of a diversified portfolio. After all, chip sales look much healthier than they did in 2022.

But I wouldn't count on a quick gain. Eight signals is a small sample, and four of the seven winning signals were followed by another drop of around 10% or more.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Micron Technology. The Motley Fool has a disclosure policy.