The VanEck Semiconductor UCITS ETF offers a relatively low-cost, diversified way to get exposure to semiconductor stocks. It invests in 25 of them from across the globe, listed in the USA.
Semiconductors are vital to the modern economy and semiconductor stocks are a way for investors to track their profits, as the production of increasingly sophisticated chips grows.
Quite simply, semiconductors are the brains of the brains of modern electronics. They are at the core of modern communications, computing, healthcare, military systems, transportation, clean energy and countless other applications. In fact, they have become critical to any country’s economic growth, competitiveness and even national security.
Yet there is a supply shortage, as shown most evidently by the shortages in the auto industry during the pandemic. To boost manufacturing capacity, the big semiconductor companies like TSMC, Samsung and Intel are substantially increasing their investments in fabrication plants (known as ‘fabs’) and next-generation chip miniaturization.1
1 https://www.eiu.com/n/chip-makers-increase-investment-for-2022-amid-shortage/
Semiconductor manufacturers' spending on research and development is growing rapidly. It’s forecast to grow 9% in 2022 to an all-time high of $80.5 billion after climbing by 13% in 2021 to $71.4 billion, according to IC Insights’ 2Q Update to the McClean Report 2022.2
Looking further forward, the report anticipates spending by semiconductor stocks will rise by a compound annual growth rate of 5.5% between 2022 and 2026 to $108.6 billion.
The industry leaders are raising their R&D spending most. IC Insights’ 2021 R&D ranking shows the top 10 collectively increased spending by 18% to $52.6 billion, which was about 65% of the industry total.
Such high R&D spending creates economic moats, protecting the profits of the big semiconductor companies and helping the performance of these stocks.
With such high barriers to entry, there is a rationale for investing in the largest and most liquid semiconductor stocks globally. These include not just the giant semiconductor manufacturers but also the companies that make the equipment for producing them, which is itself in short supply or engage in chip design.
They include well-known companies from around the globe such as TSMC, Nvidia, ASML Holding, Advanced Micro Devices and Qualcomm.
Reflecting the diversity of the industry, various types of semiconductor stocks exist. They are often classified as follows:
One should be careful when selecting semiconductor stocks to invest in. Some considerations below:
In times of market distress, smaller stocks could become more difficult to sell at market prices. Generally, liquidity risk could be reduced by investing in the larger semiconductor stocks.
An investor might be tempted to only buy them based in the country where he or she lives. However, diversifying globally actually could reduce this risk.
Even though the sector has been growing relentlessly over the last years, it has typically been cyclical. Demand might be saturated at some moment in time. Rather than picking just a few semiconductor stocks, investing globally across the whole sector could help to minimize the risk.
Risk: You may lose money up to the total loss of your investment due to the Main Risk Factors such as equity market risk, foreign currency risk and risk of investing in the Semiconductor Industry, which are described below and in the sales prospectus.
The prices of the securities included in the Fund can be impacted by the risks in relation to investment in the securities market, such as certain economic circumstances and an unforeseen decrease in value. An investment in the Fund may cause financial loss.
The equities, which the index comprises, may be traded in a different currency than that used by the investor. As a result, currency losses may have a negative impact on the return to the investor from the investment.
The Fund will be sensitive to the overall condition of semiconductor companies. These companies, among other factors, are heavily dependent on the protection of patent and intellectual property rights.
