SMH ETF: Question & Answer

Semiconductors, the crucial components driving artificial intelligence (AI), electric cars, and cloud computing, are becoming increasingly valuable in this digital age. Rather than attempting to pick individual stock winners in this ever-evolving sector, the VanEck Semiconductor ETF (SMH) provides exposure to the top 25 most liquid U.S.-listed semiconductor companies, spanning the entire industry value chain from chip design and fabrication to manufacturing machinery.

• Why Invest in Semiconductors and Why Choose VanEck’s Semiconductor ETF (SMH)?
• What is the Current Outlook for Semiconductors in 2023?
• Semiconductors and AI: How Do They Work Together?
• What is the Impact of Legislation on the Semiconductor Industry?
• Who are the Main Participants of the Semiconductor Industry?

Why Invest in Semiconductors and Why Choose VanEck’s Semiconductor ETF (SMH)?

Semiconductors are the foundational components powering our increasingly digital world. They present a compelling investment prospect based on a variety of factors, including the continued growth of technology sectors like IoT, EVs, 5G, and AI. The recent global supply chain disruptions, notably during the COVID-19 pandemic, have not only underscored the critical importance of semiconductors but also presented a potential for value and growth due to the scarcity. The industry's commitment to innovation and governmental backing, such as the U.S.'s CHIPS for America Act, further amplify this sector's appeal.

While the industry has traditionally experienced cyclical ups and downs, its long-term trajectory is one of growth, and a potential sense of stability. Investing in the VanEck Semiconductor ETF (SMH) is one way to access this opportunity. SMH offers broad exposure to the semiconductor industry, helping to diversify risk while capitalizing on the industry's overall growth potential.

What is the Current Outlook for Semiconductors in 2023?

The outlook for the semiconductor industry appears promising due to the expanding range of applications for these essential components. The continued adoption of digital technologies across various sectors, including healthcare, automotive, consumer electronics, and industrial automation, is expected to drive demand for semiconductors moving forward. These components are the foundation for digital systems, facilitating data processing, storage, and device communication. The emergence of technologies such as the Internet of Things (IoT), 5G, and edge computing, which necessitate high-performance and energy-efficient chips, also open up additional avenues for semiconductor industry growth. As these technologies become increasingly mainstream, the reliance on semiconductors deepens, thereby solidifying the industry's positive outlook.

An additional factor contributing to this bullish outlook lies in the crucial role that Graphics Processing Units (GPUs), a specific type of semiconductor, play in the realm of Artificial Intelligence (AI). GPUs possess superior computational capabilities that align with the parallel processing demands of AI and machine learning algorithms. As AI applications continue to expand, there will be a correlated rise in the demand for GPUs. This will provide an additional long-term tailwind for the sector as a whole.

Semiconductors and AI: How Do They Work Together?

Artificial Intelligence (AI) and semiconductors share a symbiotic relationship, where each fuels the growth and advancement of the other. The Graphics Processing Unit (GPU) is critical in this relationship. Initially designed for rendering images in video games, GPUs have emerged as the go-to hardware for AI due to their ability to perform many calculations at once, a requirement for training complex AI models. As AI applications continue to grow in fields ranging from autonomous driving to disease diagnosis, the demand for high-performance GPUs is increasing, making them an integral part of the semiconductor industry's future growth.

AI is not only powered by semiconductors but also contributes to their evolution as well. It is increasingly used in chip design, a field reaching its physical limits under Moore's Law, which states that the number of transistors on a chip double approximately every two years. With AI, we can explore exponentially more chip design variations, creating task-specific chips optimized for efficiency and performance in their intended applications. This approach, often called "AI on the design floor," enables us to continue advancing semiconductors despite the constraints of physical limits. With the help of AI, we believe the semiconductor industry is positioned to continue its positive trajectory, driving digital transformation across sectors for decades to come.

How Did COVID-19 Affect Semiconductors?

In 2020, the COVID-19 pandemic caused a big shake-up in the semiconductor industry. Car makers cut production costs and bought fewer chips as the virus spread. At the same time, there was a sudden increase in demand for semiconductors in areas like remote healthcare, virtual learning, and work-from-home setups. Because making semiconductors is a complex process, the industry couldn't quickly adjust to these changes. This led to a mismatch between the supply and demand of semiconductors that hasn't fully balanced out yet.

Another critical point is that many industries rely on the same type of semiconductors. This made the supply and demand issues worse during the pandemic. The semiconductor shortage hit the car industry the hardest. This was due to several reasons, including more semiconductors being used in electric cars, chip companies not wanting to invest in older car technology, and continued high demand from the consumer services sector. This mix of factors made the disruption in the semiconductor industry even more significant.

What is the Impact of Legislation on the Semiconductor Industry?

The CHIPS (Creating Helpful Incentives to Produce Semiconductors) Act in the United States and the proposed European Chips Act are landmark measures designed to stimulate domestic semiconductor production and lessen reliance on foreign suppliers.

The U.S. CHIPS Act provides a $39 billion incentive program to attract investment and boost domestic production, alongside an $11 billion initiative to foster a research and development ecosystem for the industry. It seeks to enhance supply chain resilience, increase U.S. semiconductor production, and promote safe, secure, domestically produced chips. It also encourages private sector investment and emphasizes technical feasibility, workforce development, and broader community impacts.¹

Meanwhile, the proposed European Chips Act aims to make Europe more self-reliant in semiconductors, particularly in producing advanced chips and systems. This will be achieved by boosting the EU's production capacity and strengthening technological sovereignty.

Both of these acts are expected to spur growth in the semiconductor industry through financial incentives and support for research and development, workforce development, and infrastructure expansion. They aim to mitigate risk by diversifying the supply chain, reinforcing domestic production, and enhancing technological competitiveness.

Who are the Main Participants of the Semiconductor Industry?

1. Foundry operators, such as Taiwan Semiconductor Manufacturing Company (TSMC), form the first category. These companies produce semiconductor chips according to provided specifications, acting as factories that craft chips for diverse clientele.
2. Integrated Device Manufacturers (IDMs) like Intel constitute the second category. IDMs uniquely manage the entire life cycle of a semiconductor chip within their facilities, overseeing processes from initial design to final manufacturing.
3. The third category features fabless companies like NVIDIA and Advanced Micro Devices (AMD), which focus solely on chip design and development, outsourcing the manufacturing process to foundry operators due to a lack of in-house fabrication capabilities.
4. The fourth and final category includes equipment manufacturers such as ASML, who supply the essential machinery and tools used in the manufacturing of semiconductor chips, supporting both foundry operators and integrated device manufacturers.

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¹ https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-heres-whats-in-it.