Investing in Semiconductor ETFs & Stocks

• Introduction to Semiconductors
• Why Semiconductors Matter in Investing
• The Rise of Semiconductor ETFs
• Investing in Semiconductor ETFs: Things to Consider
• Factors Influencing the Semiconductor Sector
• How AI Plays into the Future Outlook of Semiconductor Investments
• Conclusion

Introduction to Semiconductors

The semiconductor industry, a cornerstone of modern digital technology, is heavily reliant on semiconductor equipment manufacturing. These companies provide the machinery that enables the creation of integrated devices, often housed within fabrication facilities or “fabs”. The diverse range of equipment includes wafer manufacturing and processing, mask/reticle equipment, thermal processing equipment, inspection measurement, as well as assembly and packaging equipment.

At their core, semiconductors are materials, often made of silicon, that have the unique ability to conduct electricity under certain conditions, making them indispensable in the creation of electronic circuits. Their importance in modern technology cannot be overstated. From the smartphones in our pockets to the advanced computer systems driving our cars, and the vast servers powering the internet, semiconductors are truly ubiquitous. It's hard to imagine a world without them, given how intertwined they are with our daily lives and the gadgets and tools we rely on.

This prevalence in daily technology has had a cascading effect on the stock market. As the demand for advanced technology has surged, so has the semiconductor industry's growth. Reflecting this boom, which has increased the focus on semiconductor Exchange Traded Funds (ETFs), offering investors an opportunity to tap into this dynamic sector's potential. Over the years, these ETFs have seen significant appreciation, underscoring the critical role semiconductors play not just in our devices, but in the global economy.

Why Semiconductors Matter in Investing

From an economic perspective, the semiconductor industry is a powerhouse. It has been instrumental in job creation, providing employment to millions globally. Additionally, the sector consistently ranks high in research and development (R&D) investments, reflecting its commitment to innovation. This fervor for R&D not only pushes the boundaries of what's technologically possible but also cements the industry's position in global trade, making it a critical player in global economic dynamics.

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.

As we continue to ride the wave of technological advancement, semiconductors, and artificial intelligence stand at the forefront of this evolution. Together, they drive each other's growth, propelling us into an unprecedented era of technological revolution. As these two domains deepen their relationship, they're heralding a new surge of innovation. The future of AI is anchored in the creation of new, AI-optimized semiconductor chips—a dynamic we believe is poised to fuel significant growth in the next half-decade.

The Rise of Semiconductor ETFs

As the prominence of semiconductors in the global economy has grown, so has the attention of investors. One of the most intriguing investment avenues that has garnered significant interest is the Semiconductor ETF. But before we dive into the specifics, let's unpack what an ETF is and why it's become such a sought-after investment vehicle.

An Exchange Traded Fund, or ETF, is a type of security that tracks an index, sector, commodity, or other assets, which can be purchased or sold on a stock exchange, much like a regular stock. Its allure lies in its simplicity and versatility, making it a preferred choice for many investors.

Semiconductor ETFs primarily invest in stocks of companies involved in the semiconductor industry. These ETFs provide a snapshot of the sector's health and performance and provide several potential benefits for investors:

Diversification: One of the primary benefits of semiconductor ETFs is the inherent diversification they offer. Instead of investing in a single company, investors spread their risk across multiple players in the semiconductor space. This diversified approach can help mitigate potential losses and ensure a more balanced portfolio.

Accessibility: For retail investors, diving into the semiconductor sector might seem daunting. Semiconductor ETFs simplify this entry, offering an accessible route to tap into the industry's potential without needing intricate knowledge of each company within the sector.

Liquidity: A standout feature of ETFs is their liquidity. Just like stocks, semiconductor ETFs can be traded throughout the trading day at market prices. This high liquidity ensures that investors can enter or exit their positions with ease, providing flexibility in investment strategies.

As the semiconductor industry continues its upward trajectory, semiconductor ETFs present a compelling opportunity. They encapsulate the sector's dynamism, while also offering the benefits of diversification, accessibility, and liquidity. For those keen on harnessing the growth of the semiconductor world, these ETFs might just be the perfect vehicle.

Investing in Semiconductor ETFs: Things to Consider

In recent years, the semiconductor industry has experienced a notable departure from its traditional cyclical patterns, embracing a more secular behavior that defies the ups and downs tied closely to economic cycles. This transformation can be attributed to a range of factors, including the ever-expanding presence of technology in our daily lives and the surging demand for semiconductors across diverse sectors.

That said, like any investment, semiconductors come with risks. For example, 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.

Are Semiconductor ETFs a Good Investment?

In our view, these potential risks reinforce the benefits of investing in semiconductors through an ETF. By opting for semiconductor ETFs, investors can harness the benefits of diversification. Rather than having their investments tied to the fate of a single company, they spread their stakes across various players in the industry. This diversified approach not only mitigates potential losses from unforeseen industry disruptions but also allows investors to capitalize on the broader sector's growth. Thus, for those seeking a balanced exposure to the semiconductor realm, ETFs emerge as a prudent and strategic choice.

How to Invest in Semiconductors

To access the semiconductor investment opportunity, investors can buy individual stocks or choose to invest in mutual funds and / or ETFs that target semiconductor companies. Learn more about how to buy.

VanEck’s Semiconductor ETF

Rather than attempting to pick individual stock winners in the ever-evolving semiconductor 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. SMH has a global scope and invests in highly liquid companies that are considered industry leaders among semiconductors. Learn more about SMH in the fund FAQ.

VanEck’s Fabless Semiconductor ETF

The VanEck Fabless Semiconductor ETF (SMHX) offers investors targeted exposure to leading fabless semiconductor companies, mitigating individual stock risk while capturing the sector's growth potential. SMHX ETF provides a balanced investment in a dynamic and essential industry, poised for continued expansion and technological breakthroughs. Learn more about SMHX in the fund FAQ.

Factors Influencing the Semiconductor Sector

Illustrating just how critical semiconductors have become for economic prosperity, the United States is pushing to become self-sufficient in semiconductors, aiming to curb dependence on foreign supply chains. This drive follows the Covid-19 pandemic exposing the vulnerabilities in supply. In fact, the typical semiconductor production process could involve steps in more than five countries and three or more shipments across the globe. Regional bottlenecks exist at nearly every step in the value chain because of industry consolidation, labor cost dynamics and technical complexity.

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.

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.

How AI Plays into the Future Outlook of Semiconductor Investments

Machine learning thrives on vast data sets for its training and operational processes. To be harnessed effectively, this data demands speedy and efficient processing and storage, a role filled perfectly by semiconductors. These chips are found in everything—from the smartphone in your pocket to sprawling data centers—and are vital for powering AI applications.

As the applications grow increasingly complex, the demand for advanced semiconductors escalates. This expanding need represents a golden opportunity for semiconductor companies. For example, graphic processing units (GPUs) are instrumental in powering companies like OpenAI and its applications, including ChatGPT. GPUs are also used in a variety of other AI applications, including:

• Self-driving cars: GPUs are used to process the data from the car’s sensors, such as cameras and radar, to help the car navigate safely.
• Facial recognition: GPUs are used to identify people in images and videos. This technology is used in variety of applications, such as security and marketing.
• Natural language processing: GPUs are used to understand human language. This technology is used in various applications, such as voice assistants, machine translation, and spam filtering.

The GPUs’ ability to efficiently handle parallel tasks makes them perfect for the heavy-duty processing required in machine learning. These high-speed GPUs manage the large volumes of data needed to train AI models like GPT. By doing so, they enable quicker responses and better language understanding. Simply put, semiconductor technology is vital in smoothly operating applications such as ChatGPT.

AI is not just benefiting from semiconductor power; it has emerged as a significant driving force in the evolution of the semiconductor industry. AI is enhancing efficiency and profitability within the sector by redefining chip designs, identifying defects, optimizing processes, and predicting chip failures. And there’s more to the story—AI is catalyzing the creation of a new lineage of chips tailor-made for AI’s distinctive requirements and needs. These aren’t your regular chips, but one’s tailor-made for AI’s unique demands. Think of Intel (NASDAQ: INTC) and its pioneering work crafting AI-optimized chips that excel in speed, efficiency, and power management.

We believe semiconductors are the ‘picks and shovels’ way to play the AI landscape and present a compelling way to capitalize on the growing AI sector, particularly when direct access to private AI companies is limited for many investors. The VanEck Semiconductor ETF (SMH) provides a way to invest in the entire value chain of the semiconductor industry, from chip design and fabrication to the machinery used in the manufacturing process. As semiconductors are the essential components that power AI innovation, we believe they are poised to gain value amid the potential deflationary impact of AI’s efficiency—they also provide a unique opportunity to ride the wave of AI’s transformative impact.

Conclusion

The semiconductor industry is integral to the digital age, supplying equipment essential for the creation of integrated devices. These devices are utilized in smartphones, computer systems, servers, and other digital gadgets, making semiconductors an indispensable aspect of modern technology. Their importance has also influenced the stock market.

From an economic standpoint, the semiconductor sector is a powerhouse, creating jobs for millions worldwide and heavily investing in research and development. This commitment to innovation has positioned the industry as a vital player in the global economy. The increasing adoption of digital tech across various sectors, such as healthcare and automotive, predicts a rising demand for semiconductors. Emerging technologies like the Internet of Things (IoT) and 5G also present new opportunities for the industry's growth. As technology continues to advance, semiconductors and artificial intelligence will be at the forefront, fueling each other's development and leading the way into a new age of technological innovation.

The growing demand for advanced technology has caused a surge in the semiconductor industry's growth. This has given rise to semiconductor ETFs, which provide investors a chance to benefit from this sector's expansion. We encourage you to explore the VanEck Semiconductor ETF (SMH) and the VanEck Fabless Semiconductor ETF (SMHX) to understand how these ETFs can be valuable additions to your portfolio.

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