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Fabless Semiconductor Companies: Winners in the CHIPS Act Era

August 28, 2024

Read Time 3 MIN

The CHIPS Act is revolutionizing the semiconductor industry, giving fabless chip designers lower production costs, improved technology access, and greater flexibility, driving innovation and competitiveness.  

The global semiconductor industry is experiencing a transformation driven by government initiatives like the CHIPS Act in the United States. These efforts aim to boost semiconductor production, but the ripple effects extend far beyond the factories. One significant beneficiary of this surge in manufacturing capacity is the chip design sector. By outsourcing their production, chip designers stand to gain from the increased competitiveness and efficiency of semiconductor manufacturing.

CHIPS Act from Ten Thousand Feet

The CHIPS Act, officially known as the CHIPS and Science Act, is a substantial government initiative aimed at revitalizing the semiconductor industry in the United States. With over $52 billion allocated for manufacturing and research, this act seeks to reduce dependency on foreign manufacturing, create jobs, and secure the supply chain. While these goals are ambitious, the broader impact on the semiconductor ecosystem is equally important.

Current Funding Totals by Company

Company Amount Factory Locations
Intel $8.5 billion Arizona, New Mexico, Oregon, Ohio
TSMC $6.6 billion Arizona
Samsung $6.4 billion Texas
Micron $6.14 billion New York
Global Foundries $1.5 billion New York, Vermont
Microchip Technology $162 million Colorado, Oregon
Polar Semiconductor $120 million Minnesota
BAE Systems $35 million New Hampshire
Total $17.1 billion  

Increased Manufacturing Capacity

The increase in manufacturing capacity is substantial. So far, Intel has received $8.5 billion from the Act for its semiconductor projects, including new factories in Ohio, Arizona, New Mexico, and Oregon. Similarly, TSMC and Samsung have received significant funding to expand their U.S. operations. The Semiconductor Industry Association estimates that the CHIPS Act has already garnered over $450 billion in private investments, further boosting global manufacturing capacity.

This legislative funding and similar global initiatives are set to reshape the semiconductor industry. While the primary goal is to secure supply chains and reduce dependency on foreign manufacturing, the benefits for chip designers are clear. Increased manufacturing capacity, driven by substantial investments, could create a more competitive environment, lowering production costs and improving access to advanced technologies. Fabless, aka Chip design companies, can leverage these advantages and focus on innovation and development, ultimately benefiting from global semiconductor production's increased flexibility and scalability.

Fundamental Benefit for Fabless Semiconductor Companies

Chip design companies typically do not own manufacturing facilities and rely on third-party manufacturers to produce their designs. This model, the fabless model, allows these businesses to focus on innovation and development without the heavy capital investment required for building and maintaining fabs. As global manufacturing capacity increases, several benefits emerge for chip designers:

  • Lower Production Costs: With more fabs competing for business, production costs will likely decrease. This competition among manufacturers can lead to lower prices for chip production, benefiting designers who can negotiate better deals.
  • Improved Access to Advanced Technology: Increased investments in manufacturing also mean more advanced technology will be available. Fabs will upgrade their processes to attract business, providing chip designers access to state-of-the-art manufacturing techniques that can improve the performance and efficiency of their designs.
  • Greater Flexibility and Scalability: As more fabs come online, chip designers will have greater flexibility in choosing manufacturing partners. This flexibility allows them to scale production quickly in response to market demands, reducing the risk of supply chain disruptions.
  • Focus on Core Competencies: By outsourcing production, chip designers can concentrate on their core competencies—innovative design and development. This focus can lead to more cutting-edge products and a stronger competitive position in the market.

Potential Supply-Demand Dynamic Shift

With substantial investments flowing into the construction and expansion of fabrication plants (fabs), the global production of semiconductors is set to rise. This increase in manufacturing capacity could create a supply-demand imbalance that benefits the chip designers.

Historically, the semiconductor industry has seen periods of boom and bust. During times of high demand, manufacturing capacity often struggles to keep up, leading to shortages and higher prices. Conversely, when supply exceeds demand, prices fall, and manufacturing becomes more competitive. The current wave of investments aims to build a more resilient and flexible supply chain, but it also means that more fabs will be capable of producing a higher volume of chips.

SMH Index Holdings

Source: VanEck as of 6/21/2024.

How to Invest In Semiconductor Companies

Funds like VanEck Semiconductor ETF (SMH) benefit from the CHIPS Act in two ways: investing in foundries that should see higher revenue from new manufacturing plants and allocating to fabless chip designers who benefit from more competitive pricing due to increased manufacturing. Investors can also access targeted exposure to fabless chip designers with the VanEck Fabless Semiconductor ETF (SMHX).

Cumulative Performance of Fabless Names Outpaces the Category and Broad Markets

Cumulative Performance of Fabless Names Outpaces the Category and Broad Markets

Source: Morningstar, Data as of 07/31/2024. The BlueStar Top 10 U.S. Listed Fabless Semis does not represent the funds underlying indices. The performance data quoted represents past performance. Past performance is not a guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Performance may be lower or higher than performance data quoted. See important disclosures and index descriptions at end. This is not an offer to buy or sell, or recommendation to buy or sell any of the securities mentioned herein. Futures carry additional risks and are not suitable for all investors.

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Disclosures

BlueStar Top 10 US Listed Fabless Semis: Index that tracks fabless semiconductor companies.

NASDAQ Global Semiconductor: Index that tracks 80 of the largest semiconductor companies globally.

NASDAQ 100: Index that tracks 100 of the largest non-financial companies listed on Nasdaq.

Intel comprised 4.29% of SMH net assets as of 6/21/2024.

Micron comprised 4.44% of SMH net assets as of 6/21/2024.

Microchip Technology comprised 1.52% of SMH net assets as of 6/21/2024.

Holdings will vary for the SMH ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here.

Holdings will vary for the SMHX ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the VanEck Semiconductor ETF (SMH) and VanEck Fabless Semiconductor ETF (SMHX) may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation

Disclosures

BlueStar Top 10 US Listed Fabless Semis: Index that tracks fabless semiconductor companies.

NASDAQ Global Semiconductor: Index that tracks 80 of the largest semiconductor companies globally.

NASDAQ 100: Index that tracks 100 of the largest non-financial companies listed on Nasdaq.

Intel comprised 4.29% of SMH net assets as of 6/21/2024.

Micron comprised 4.44% of SMH net assets as of 6/21/2024.

Microchip Technology comprised 1.52% of SMH net assets as of 6/21/2024.

Holdings will vary for the SMH ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here.

Holdings will vary for the SMHX ETF and its corresponding Index. For a complete list of holdings in the ETF, please click here.

This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned is unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.

An investment in the VanEck Semiconductor ETF (SMH) and VanEck Fabless Semiconductor ETF (SMHX) may be subject to risks which include, among others, risks related to investing in the semiconductor industry, equity securities, special risk considerations of investing in Asian, European and Taiwanese issuers, foreign securities, emerging market issuers, foreign currency, depositary receipts, medium-capitalization companies, issuer-specific changes, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified, and industry concentration risks, all of which may adversely affect the Fund. Emerging market issuers and foreign securities may be subject to securities markets, political and economic, investment and repatriation restrictions, different rules and regulations, less publicly available financial information, foreign currency and exchange rates, operational and settlement, and corporate and securities laws risks. Medium-capitalization companies may be subject to elevated risks.

Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com/etfs. Please read the prospectus and summary prospectus carefully before investing.

© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation