U.S. and Taiwan Semiconductor ETF Investment Guide: Comparing SMH, SOXX, XSD, and Local Funds

Why Are Semiconductor ETFs Worth Paying Attention To?

From the popularization of personal computers to the current AI era, chips have become the core of modern life. Regardless of how technological platforms evolve—from PCs to smartphones to cloud computing—semiconductors play an indispensable role. Taiwan, as a global manufacturing hub for semiconductors, combined with the US’s design and manufacturing advantages and Europe’s equipment supply chain, has formed a complete global division of labor. Investing in semiconductor ETFs is essentially participating in this wave of industry upgrading.

The Core Logic of Choosing Semiconductor ETFs

Compared to individual stock investments, the biggest advantage of ETFs is risk diversification. However, there are fundamental differences among semiconductor ETFs, and the key to choosing lies in understanding the index logic behind each fund.

Market Cap-Weighted vs. Free Float Market Cap-Weighted

Market Cap-Weighted Index follows the logic of “the bigger, the bigger,” with leading companies having higher weights. Representative products like SMH (VanEck Vectors Semiconductor ETF) track the 25 largest semiconductor companies by market cap, with a single stock cap of 20%. This setup allows investors to capture the growth of industry leaders but also entails higher concentration risk.

Free Float Market Cap-Weighted Index aims to reduce individual stock risk. SOXX (iShares Semiconductor Industry ETF) adopts this approach, with a single stock cap of only 8%. Its underlying logic emphasizes US-based companies, so ADR stocks (like TSMC)) are limited in weight, even though these companies have large market caps. Over the past five years, SOXX’s performance has lagged behind SMH, mainly because non-US companies like TSMC and ASML performed well, but SOXX’s weight restrictions prevented it from fully benefiting.

Equal-Weight Index as an Alternative

XSD (SPDR S&P Semiconductor ETF) takes the opposite approach, employing equal weighting. It includes 39 companies, ranging from industry leaders to small and medium-sized firms, with the largest being First Solar with a market cap of only $30 billion. This ensures higher diversification but at the cost of performance lagging behind leading stocks during market rallies.

Taiwan Stock Semiconductor ETFs: Domestic and Overseas Options

Taiwanese tech stocks account for over 70% of the Taiwan stock market value, most of which are related to the semiconductor industry. Investing in Taiwan’s major indices like 0050 or 006208 already involves semiconductor exposure, but for more focused industry investment, there are more specialized options.

00941 CTBC Upstream Semiconductor ETF is the largest in scale in Taiwan, but its holdings mainly consist of semiconductor materials and equipment suppliers, rather than the most profitable wafer foundries and IC design companies.

More recommended are 00891 CTBC Key Semiconductor ETF and 00830 Cathay Fubon Philadelphia Semiconductor ETF.

00891 selects 30 Taiwanese listed semiconductor companies, using a weighting method different from pure market cap, incorporating dividend yield, market cap, and ESG factors. This may perform slightly below the market in the short term but offers more stable long-term investment. It covers upstream, midstream, and downstream industries, providing good diversification.

00830 tracks the Philadelphia Semiconductor Index, similar to the US-based SOXX. For investors preferring TWD-denominated investments, this offers a localized alternative.

In-Depth Comparison of US Semiconductor ETFs

SMH: The Largest Global Choice

SMH (VanEck Vectors Semiconductor ETF) has a scale of $21.9 billion and has led among mainstream semiconductor ETFs over the past five years. It tracks the MVIS US Listed Semiconductor 25 Index, which includes the 25 largest US semiconductor companies, weighted by market cap.

As of June 2024, the top ten holdings are: NVIDIA (24.36%), TSMC ADR (12.89%), Broadcom (7.35%), Qualcomm (4.98%), ASML (4.60%), etc. Notably, NVIDIA’s weight has exceeded the 20% cap, which will require selling pressure during rebalancing.

Advantages:** Focuses on industry leaders, liquidity is ample, with a 10-year annualized return of 27.32%, outperforming the S&P 500.

Disadvantages:** High concentration risk; fluctuations in a single stock can significantly impact the ETF.

SOXX: The Oldest Regional-Focused Choice

Founded in 2001, originally tracking the Philadelphia Semiconductor Index, later switched to the Intercontinental Semiconductor Index. Its core feature is focusing on US-listed companies, with ADR stocks limited to 10%.

As of June 2024, the top holdings are: NVIDIA (10.91%), Broadcom (8.03%), Qualcomm (7.37%), AMD (5.90%), Micron (5.33%), etc. TSMC’s weight is only 4.24%, and ASML is not among the main holdings.

Advantages:** Good diversification of individual stock risk, suitable for long-term retirement planning.

Disadvantages:** Higher regional risk; recent performance has lagged SMH mainly because it cannot fully participate in the growth of Taiwanese and European companies.

XSD: Small but Beautiful Multi-Asset Allocation

XSD is the smallest in scale ($1.54 billion), including 39 companies, employing an equal-weight approach, comprising companies classified as semiconductors in the S&P 500. The highest weight is First Solar Inc. (4.40%), NVIDIA only 3.26%.

Advantages:** Highly diversified, lowest concentration risk.

Disadvantages:** Performance cannot keep pace with leading stocks, and smaller scale results in relatively lower liquidity.

How to Start Investing in Semiconductor ETFs

Account Selection

Taiwanese Brokerage Firms with Custody Delegation: Highly convenient, allows direct TWD trading, but transaction fees are relatively higher, suitable for long-term investors.

Online Brokerage Accounts: Most US online brokers offer commission-free trading, convenient, but limited in available tools and leverage.

Derivative Products Accounts: Offer higher leverage and short-selling mechanisms, suitable for short-term traders, but do not allow dividends or participation in shareholder meetings.

Investment Strategy Recommendations

Given current geopolitical risks and the de-dollarization trend, diversification is especially important. It is recommended to allocate across different styles of ETFs:

• Long-term Core Allocation: Choose either SMH or SOXX, depending on confidence in US dominance. If believing that the US chip industry will remain leading, SOXX’s regional focus offers a relatively safe long-term option.
• Regional Balance: Use 00891 to supplement Taiwan semiconductor investments, creating an east-west complement.
• Short-term Fluctuation Trading: Use derivatives for technical trading to capture market volatility.

The key is to tailor your choices based on personal risk tolerance and investment horizon. For ultra-long-term investments (over 10 years), accepting regional risks is feasible, while medium-term investors should prefer diversified allocations.

Conclusion

Semiconductor ETFs provide a convenient way to access this strategic industry. As AI applications expand and global chip demand continues to grow, the growth momentum of the semiconductor sector remains strong. Compared to picking individual stocks, ETFs offer advantages in risk management and trading convenience.

Whether choosing US or Taiwan semiconductor ETFs, the core principles are: understand the index logic, assess your risk tolerance, and maintain diversification. Seize this wave of technological industry upgrading to align your asset allocation with the times.