The semiconductor industry is very popular with investors. Investors are spoiled for choice between the different companies. Do you want to bet on the fast-growing US company NVIDIA, which benefits from numerous megatrends? Or would you rather bet on the traditional company Intel, which offers a chance of recovery thanks to a new strategy and a favorable valuation? At the same time, investors can also invest in the shovel manufacturers of the semiconductor industry. Here, for example, the Taiwanese chip production leader TSMC or the Dutch company ASML Holding, which manufactures lithography systems, are promising candidates for above-average returns.
However, those who cannot or do not want to choose a company can also passively benefit from the growth of the semiconductor industry. This is possible on the stock market with exchange-traded funds, which allow diversified investments in individual sectors. In the following article, we take a closer look at semiconductor ETFs that German investors can invest in. Should you buy a semiconductor ETF now?
Semiconductor ETFs: Which are the most important semiconductors?
At the heart of the semiconductor industry are the “microchips” or computer chips produced by semiconductor companies. Microchips are made of pure silicon and have electrical contacts. A microchip consists of several semiconductors so that the chips can be used in different areas. The important semiconductors are the basis for digitalization. Without semiconductors as a supporting component, hardly any technical device could function.
The semiconductor industry is growing faster than the global economy
The global semiconductor industry is a cyclical market. Its growth is around 5% per year. In the coming years, growth rates of around 5.4 percent per year are even expected on average. Digitalization is making its way into almost all areas of life, so the semiconductor industry will likely continue to grow in the future. Growth is outpacing the development of the global economy. Since digitalization is only just beginning, the semiconductor market will likely be much larger in a decade than it is today. This will primarily benefit semiconductor stocks, which will be able to convert the increased demand into increased sales.
Megatrends drive semiconductor growth
The semiconductor industry is not only benefiting from the omnipresent megatrend of digitalization. There are also individual developments that are also fueling growth. For example, applications in the field of artificial intelligence require the important computer chips. The success of robotics, autonomous driving or automation also imperatively depends on semiconductors.
Semiconductor ETF #1: iShares MSCI Global Semiconductors ETF
The iShares MSCI Global Semiconductors ETF is still a young financial product. In August 2021, asset manager BlackRock launched a new semiconductor ETF with its market-leading iShares brand. It physically tracks the underlying index and accumulates returns. The TER’s expense ratio is 0.35%, which is at a reasonable level.
The strategy
The iShares MSCI Global Semiconductors ETF tracks companies from developed and emerging markets that are involved in the global semiconductor industry. Only semiconductor manufacturers and their suppliers are included in the ETF.
The allocation
The iShares MSCI Global Semiconductors ETF focuses on US companies, which represent the largest share with a weighting of around 65%. Taiwanese companies come in second with a share of around 15%, followed by Dutch and Japanese companies with a weighting of over 5%.
Largest positions
US company NVIDIA has shown above-average growth in recent years. The technology leader is the largest position in the semiconductor ETF with around 8%. Contract manufacturer TSMC, traditional company Intel and lithography system manufacturer ASML follow in the other places with also over 7% share of the ETF.
Semiconductor ETF #2: VanEck Vectors Semiconductor ETF
The VanEck Vectors Semiconductor ETF is a physical ETF that accumulates income. With over €700 million in fund assets, the VanEck product is the largest semiconductor ETF. The expense ratio is 0.35% TER. When the semiconductor ETF was launched in late 2020, it was also the first exchange-traded fund to focus on the semiconductor sector.
The strategy
The VanEck Vectors Semiconductor ETF tracks companies in the semiconductor sector. It is important that manufacturers and suppliers generate at least 50% of their revenue from semiconductors. At least 25 stocks should always be in the VanEck Vectors Semiconductor ETF. The maximum weighting is set at 10% per company.
Allocation
The second semiconductor ETF, the VanEck Vectors Semiconductor ETF, has an even stronger dominance in the US. More than 75% of the companies are based in the US. Taiwanese and Dutch companies make up the vast majority of the rest of the ETF, with around 9% each.
Largest positions
In the VanEck Vectors Semiconductor ETF, the US company Intel is currently the largest position with a weighting of 10%. In addition, NVIDIA, TSMC and ASML are also represented with more than 9%. Both semiconductor ETFs therefore have the same largest positions.
Outlook for semiconductor ETFs
The positive future outlook for the global semiconductor market also highlights opportunities for semiconductor ETFs. If the entire sector continues its strong growth and megatrends drive demand, companies are expected to generate ever higher revenues. To this end, it will probably take some time to compensate for the chip shortage. The forecasts for the future of semiconductor ETFs are excellent. If you can’t choose the most promising company, you can outperform broad-based exchange-traded funds with a semiconductor ETF.
Should I buy a semiconductor ETF now?
Many semiconductor stocks have outperformed in the past year. The Corona pandemic has drawn investors’ attention to stocks that benefit from digitalization. As a result, semiconductor ETFs are also rising sharply despite their young history. In the long term, a purchase of the semiconductor ETF should nevertheless be profitable. Investors can also invest in the semiconductor sector via an ETF savings plan. Since this is a cyclical sector, weaker market phases are likely to follow. So brave investors should take up the issue and significantly increase their semiconductor ETF. Because countercyclical investing also works with ETFs and can be a turbo for returns.
