How to choose semiconductor ETFs? In-depth analysis of popular US and Taiwan stock market targets

With the rise of the AI wave, the strategic importance of the semiconductor industry is increasingly highlighted. From personal computers to smartphones, cloud computing, and now the era of artificial intelligence, chips serve as the “brain” of all electronic devices and have become an indispensable core component. Numerous ETF products focusing on the semiconductor industry have emerged in the Taiwan and US markets. These funds track specific indices, allowing investors to conveniently participate in this industry full of growth potential.

Choices of Semiconductor ETFs in Taiwan

Taiwan, as a global hub for the semiconductor industry, offers several specialized industry funds. Although the 00941 CTBC Upstream Semiconductor ETF is the largest domestic semiconductor ETF, its main allocation is in materials and equipment manufacturers, lacking exposure to the more profitable IP design, chip design, and wafer foundry sectors, resulting in relatively limited growth momentum.

More noteworthy are the following two:

00891 CTBC Key Semiconductor ETF includes 30 Taiwanese listed semiconductor companies, with at least 50% of revenue derived from semiconductor-related businesses. The fund employs an innovative weighting mechanism that combines dividend yield, market capitalization, and ESG factors, rather than solely relying on market cap for weighting. This design results in a more balanced component stock allocation—no single stock exceeds 20%, covering upstream, midstream, and downstream industries. Short-term performance may lag behind the broader market, but long-term investment risks are lower.

00830 Cathay Fubon Philadelphia Semiconductor ETF tracks the well-known Philadelphia Semiconductor Index. Since the original SOXX tracked this index before switching to the Intercontinental Exchange (ICE) Semiconductor Index, the differences are minimal. Investors can choose based on currency preference—if they prefer TWD valuation, select 00830; for USD exposure, consider the US stock version.

Overview Comparison of US Semiconductor ETFs

The US market offers a richer lineup of semiconductor ETFs with larger scale and liquidity. Among them, three are particularly noteworthy for in-depth analysis.

SMH (VanEck Vectors Semiconductor ETF)

As the largest semiconductor fund globally, SMH has been highly regarded in the industry over the past five years for its impressive performance. The fund tracks the MVIS US Listed Semiconductor 25 Index, selecting the 25 largest US-listed semiconductor companies by market cap, weighted by market cap with a maximum of 20% per stock.

As of June 11, 2024, the top ten holdings are:

Due to recent strong gains in NVIDIA and TSMC, these two stocks have relatively high weights. Notably, NVIDIA has exceeded the 20% cap, and a quarterly adjustment is expected, which may lead to a correction and selling pressure.

Advantages: Focuses on industry leaders, offers high stock liquidity, and benefits from the recent excellent performance of the semiconductor sector, with a 10-year annualized return of 27.32%, significantly outperforming the S&P 500.

Disadvantages: The 20% cap on individual stocks results in higher concentration risk. If major components like NVIDIA or TSMC undergo adjustments, it could significantly impact the fund’s net asset value.

SOXX (iShares PHLX Semiconductor ETF)

SOXX is one of the earliest semiconductor funds launched, established in 2001. Originally tracking the Philadelphia Semiconductor Index, iShares later switched to tracking the ICE Semiconductor Index based on performance evaluation.

The main difference from SMH is the individual stock weight limit. SOXX restricts single holdings to 8%, resulting in a more diversified risk profile. However, this also means that when certain stocks perform well, the fund will reduce holdings to maintain balance.

Stock characteristics: The fund leans toward US domestic companies. Non-US giants like TSMC and ASML have large market caps but smaller weights in SOXX—TSMC accounts for only 4.24% due to limited ADR float.

As of June 11, 2024, the top ten holdings are:

Advantages: Low stock risk concentration, with an 8% cap significantly reducing the impact of any single company’s volatility. Suitable for investors seeking balanced allocation.

Disadvantages: Higher regional concentration risk, mainly focused on US companies. Over the past five years, performance has slightly lagged SMH, mainly because ASML and TSMC performed exceptionally well but had limited weights in SOXX, preventing the fund from fully capturing their gains.

XSD (SPDR S&P Semiconductor ETF)

Issued by State Street, XSD tracks the S&P Semiconductor Select Industry Index, which is relatively small in scale. The fund selects stocks classified under the GICS semiconductor industry within the S&P 500, using equal weighting.

Due to equal weighting and periodic rebalancing, the highest weightings are assigned to companies like First Solar, with a market cap of only $30 billion, much smaller than NVIDIA. Despite the size gap, recent performance has been better than large-cap stocks, leading to relatively higher weights.

Advantages: Covers a broad range of 39 stocks with balanced weights, resulting in the lowest concentration risk and better diversification.

Disadvantages: Lacks industry giants like TSMC and ASML, making it difficult to keep pace with the rally driven by large-cap stocks. The fund’s small size also limits liquidity.

Comparison of the three US semiconductor funds

How to Choose the Most Suitable Semiconductor ETF?

Based on investment time horizon: For retirement planning over more than 10 years, prefer highly diversified products like SOXX to reduce single-company risk. For medium- to short-term growth opportunities, SMH’s concentrated holdings of industry leaders can better benefit from the growth of leading companies.

Consider geopolitical risks: With de-dollarization and geopolitical tensions increasing, regional risks are rising. Investors should allocate appropriately between US and Taiwan funds to diversify regional exposure.

Assess personal risk tolerance: Conservative investors seeking steady growth may choose SOXX; aggressive investors confident in large-cap dominance and willing to accept volatility may prefer SMH; those seeking broad diversification can consider XSD.

Practical Ways to Invest in the Semiconductor Industry

Leading global semiconductor companies are mainly concentrated in the US, Taiwan, and Europe, with most listed on US stock exchanges. Opening a US trading account is the most straightforward way to participate.

Taiwanese brokerage accounts: Advantages include trading directly in TWD and ease of operation; disadvantages are higher transaction fees, suitable for long-term buy-and-hold strategies.

Online brokerage accounts: Some offer commission-free US stock trading, but with limited tools and leverage options, more suitable for medium- to long-term investors.

CFD (Contract for Difference) accounts: No commission fees, support long and short positions with higher leverage, ideal for short-term traders. However, CFD trading does not involve actual stock ownership and cannot participate in shareholder meetings or receive dividends.

Investment Strategy Recommendations

Focus on innovation leaders: Choose companies leading in technological breakthroughs and market share, such as TSMC, Intel, and ASML, representing industry development directions.

Use ETFs for diversification: Compared to tracking individual stocks, funds provide inherent risk management, with one ETF covering multiple industry leaders.

Combine technical and fundamental analysis: Study technical trends and financial fundamentals to accurately time entry and exit points, improving investment efficiency.

Balance long-term core holdings with tactical adjustments: Establish long-term positions to participate in industry growth, while using short-term volatility for tactical rebalancing to manage risk and return.

Summary

Semiconductor ETFs are essentially baskets of industry-related stocks. With explosive growth in AI applications, this sector is expected to enter a long-term bullish environment. Compared to selecting individual stocks, ETFs offer a more convenient and balanced way to participate. Investors can choose the most suitable products from the US semiconductor ETF list based on their time horizon, risk appetite, and industry outlook, thereby seizing the wealth redistribution opportunities in the global semiconductor industry.