Recommended US Stock Semiconductor ETFs and Comprehensive Investment Guide

Why Is Now a Good Time to Invest in Semiconductors?

From the popularity of personal computers to the smartphone revolution, and now the AI wave, every technological advancement relies on chips as the “brain.” Semiconductors are no longer an obscure industry but the core driver of the entire information age. As AI applications explode in growth, the demand for computing power reaches unprecedented heights, ushering in a new investment opportunity in the semiconductor industry.

Taiwan, as a global semiconductor hub, is supported by leading companies like TSMC and MediaTek, which uphold the island’s tech stock landscape. Market data shows that over 70% of listed companies in Taiwan are in the tech sector, with the core drivers being semiconductors and their upstream and downstream industries. This also explains why investing in Taiwan’s major stocks (such as 0050, 006208) essentially includes semiconductor investment components.

The Three Major Choices of U.S. Semiconductor ETFs

The U.S. market’s semiconductor ETFs are much larger in scale than those in Taiwan, offering a richer selection. Investors can choose different funds based on their investment philosophy.

SMH: Focus on Industry Leaders

VanEck Vectors Semiconductor ETF (SMH) is the largest semiconductor fund globally, with assets totaling $21.9 billion. It tracks the MVIS US Listed Semiconductor 25 Index, holding the 25 largest semiconductor companies by market cap worldwide.

Using a market-cap weighted selection logic, individual stock weights are capped at 20%. As of mid-2024, NVIDIA and TSMC ADRs account for 24.36% and 12.89%, respectively, totaling over 37%. Due to the strength of industry leaders, SMH has achieved an annualized return of 27.32% over the past 10 years, far surpassing the S&P 500.

Advantages: Focuses on industry leaders, tracks growth of advanced companies, high liquidity.
Risks: High concentration, significant impact from fluctuations of single stocks. When giants like NVIDIA retreat, the fund faces noticeable pressure.

SOXX: Diversified Focus on U.S. Companies

iShares PHLX Semiconductor ETF (SOXX) is a veteran in the industry, established in 2001. It adopts a free-float market cap weighting, with individual stock weights not exceeding 8%, significantly reducing concentration risk. Notably, the fund mainly focuses on U.S. companies, with ADR holdings limited to 10%.

This means that despite TSMC and ASML’s large market caps, their weights in SOXX are relatively small. Over the past five years, due to stellar performance from TSMC and ASML, SOXX’s returns have lagged behind SMH. The fund’s assets total $15 billion.

Advantages: Low maximum weight per stock, more evenly diversified risk, suitable for long-term steady investing.
Risks: Increased regional concentration risk; if the U.S. market loses its advantage, overall performance may suffer.

XSD: An Alternative for Small-Cap Semiconductor Companies

State Street’s XSD tracks the S&P Semiconductor Select Industry Index, with a smaller scale of $1.54 billion. It employs an equal-weighted approach, covering 39 constituents, offering greater diversification.

Unlike the previous two, XSD does not include TSMC or ASML, mainly investing in semiconductor-related companies classified within the S&P 500. Currently, the highest weight is First Solar, with a market cap of only $30 billion, making its nature closer to “semiconductor and related companies” rather than “industry giants.”

Advantages: Highly diversified, minimal risk from individual companies, suitable for investors seeking to avoid concentration risk.
Risks: Many constituents are small- and mid-cap companies, which may struggle to lead in market rallies, potentially resulting in lower long-term returns compared to SMH and SOXX.

Choices of Semiconductor ETFs in Taiwan

The largest semiconductor ETF in Taiwan is 00941 CTBC Upstream Semiconductor ETF, but it mainly invests in equipment and materials suppliers, lacking profit-rich wafer foundries and IC design companies, limiting growth potential.

More noteworthy are the following two:

00891 CTBC Key Semiconductor ETF: Selects 30 listed Taiwanese semiconductor companies (with over 50% revenue from semiconductors), using a combined weighting of dividend yield, market cap, and ESG factors, with individual stock weights capped at 20%. Since it does not solely weight by market cap or profit, its short-term performance may lag behind the broader market, but it offers more stable long-term growth. It has a balanced layout across upstream, midstream, and downstream industries, with clear diversification.

00830 Cathay Fubon Philadelphia Semiconductor ETF: Tracks the Philadelphia Semiconductor Index, covering well-known global semiconductor companies. This index was previously the benchmark for the U.S. SOXX, but after switching to the Intercontinental Semiconductor Index, 00830 has become the main way for TWD investors to access the Philadelphia index.

Choosing between the two mainly depends on whether investors prefer TWD or USD denominated investments.

How to Choose the Right ETF for You?

The Difference in Stock Selection Logic Determines Future Performance

The core difference among semiconductor ETFs lies in their index selection logic. Market-cap weighted funds (like SMH) follow the “big is better” principle, concentrating on industry leaders; free-float market cap funds (like SOXX) aim for diversification; equal-weighted funds (like XSD) give each company an equal initial opportunity.

Over the past five years, the performance of the global semiconductor industry has diverged significantly. NVIDIA and TSMC’s outstanding performance boosted SMH, while SOXX’s capped weights limited its gains, resulting in relatively lagging performance.

Investment Time Frame Is Critical

For retirement planning over more than 10 years, it’s recommended to choose funds like SOXX with high diversification and lower individual stock risk, avoiding long-term erosion from single-company volatility.

If the goal is to capture rapid industry growth within 3 to 5 years, ETFs focusing on industry leaders like SMH may be more suitable, as long as short-term fluctuations can be tolerated.

Practical Strategies for Investing in the Semiconductor Sector

The global semiconductor industry is mainly concentrated in the U.S., Taiwan, and Europe, with most companies listed on U.S. stock exchanges. Therefore, opening a U.S. brokerage account is essential.

Taiwan Brokerage Accounts via Sub-Agency

Allow direct trading in TWD, with simple operation procedures. The downside is relatively higher transaction fees, suitable for long-term holders.

Online Brokerage Accounts

Some online brokers offer commission-free trading, reducing costs. Limitations include fewer trading tools and leverage options, making them suitable for medium- to long-term strategies.

CFD Contracts Accounts

No commission on buy/sell, supports long and short positions, with flexible leverage, ideal for short-term trading. The downside is inability to hold physical stocks, participate in shareholder meetings, or receive dividends.

Key Points for Developing Your Investment Strategy

Focus on Innovative Industry Leaders: Choose companies with high R&D investment, leading technology, and solid market share, such as TSMC, Intel, NVIDIA.

Diversify via ETFs: Instead of picking individual stocks, hold a basket of stocks through ETFs to automatically avoid single-company risks.

Combine Technical and Fundamental Analysis: Use technical analysis to find good entry points, and fundamental research to select long-term upward trending targets.

Employ a Flexible Long-Short Strategy: Maintain confidence in the long-term prospects of the semiconductor industry with regular dollar-cost averaging, while leveraging short-term price movements for profit.

Summary

Semiconductors have evolved from a cyclical industry into a long-term growth track. The explosive demand for AI computing power injects new growth momentum into the entire industry. Whether it’s foundries like TSMC or design companies like NVIDIA and AMD, they are all in a historic opportunity period.

When choosing U.S. semiconductor ETFs, there is no absolute best—only the most suitable for your needs. SMH is ideal for investors confident in the continued leadership of industry giants; SOXX suits those seeking steady long-term allocation; XSD offers an alternative for small-cap enthusiasts.

By selecting appropriate accounts and investment strategies, and flexibly combining different ETFs, you can maximize your chances of capturing the long-term wealth opportunities brought by the semiconductor industry.