Semiconductor Sector Investment Guide: How to Choose Taiwan Stock and US Stock ETFs

As the AI era approaches, the critical position of the semiconductor industry becomes increasingly prominent. From personal computers to smartphones, and then to cloud computing and artificial intelligence, every technological innovation relies on chips as the “brain.” They are responsible for computing, storage, and transmission of various information, and have become the foundation of modern industries. Investors who want to seize this industry upgrade opportunity may consider ETFs for diversification and risk management.

Why Semiconductor ETFs Are Worth Attention

Nearly 70% of the market value of listed companies in Taiwan comes from the tech industry, and over 70% of tech stocks are related to TSMC and its supply chain. This indicates that the semiconductor industry is deeply embedded in the structure of Taiwan’s stock market. At the same time, there are many pure semiconductor companies in the US stock market, with North America, Taiwan, and Europe forming the core map of the global semiconductor industry.

For those interested in industry-specific investments, ETFs offer a simple solution—no need to pick individual stocks, just choose a suitable index fund to achieve industry-average performance.

Which Semiconductor ETFs Are Available for Taiwanese Investors

Taiwan Market Targeted ETFs

If you base your exposure on Taiwan’s main index:

• 0050 (Yuanta Taiwan 50 ETF): Covers the 50 largest companies by market cap in Taiwan, with a significant weighting in semiconductors, but also includes other industries.
• 006208 (Fubon Technology ETF): Focuses on Taiwanese tech stocks, including several chip-related companies, but not purely semiconductor.

Pure Semiconductor-Focused Taiwan ETFs

For more pure semiconductor investments:

• 00941 (CITIC Upstream Semiconductor ETF): The largest Taiwan semiconductor ETF, mainly investing in overseas semiconductor materials and equipment manufacturers, lacking high-margin segments like IC design and wafer foundries.
• 00891 (CITIC Key Semiconductor ETF): Selects 30 listed Taiwanese semiconductor companies (over half of revenue from semiconductors), covering upstream, midstream, and downstream, weighted by dividend yield, market cap, and ESG factors, with a maximum of 20% per stock. Long-term performance is more stable.
• 00830 (Cathay Philadelphia Semiconductor ETF): Tracks the Philadelphia Semiconductor Index, including globally renowned chip manufacturers, allowing participation in the international semiconductor wave.

US Market Semiconductor ETFs

US market offers more options and larger scale:

• SMH (VanEck Vectors Semiconductor ETF): The largest globally, tracking the top 25 US semiconductor companies, weighted by market cap, with a 20% cap per stock, outperforming over the past 5 years.
• SOXX (iShares PHLX Semiconductor ETF): An established fund (since 2001), tracking the PHLX Semiconductor Index, with an 8% cap per stock, focusing on US companies.
• XSD (SPDR S&P Semiconductor ETF): Equal-weighted, covering the S&P Semiconductor Select Industry Index components, smaller scale but more diversified.

How to Evaluate Different Semiconductor ETFs

Differences in Index Selection Logic

Market Cap Weighted (e.g., SMH)

• Logic: Big companies stay big, tracking the top 25 by market cap
• Advantages: Captures growth of industry leaders, high liquidity, 27.32% annualized return over 10 years
• Risks: High concentration risk, fluctuations in NVIDIA and TSMC directly impact NAV

Free Float Market Cap (e.g., SOXX)

• Logic: Mainly invests in US domestic companies, with an 8% cap per stock
• Advantages: Diversifies individual stock risk, avoids over-concentration
• Risks: Regional risk increases, may miss growth opportunities in non-US firms like TSMC and ASML

Equal Weight (e.g., XSD)

• Logic: Equally allocates among 39 components, including small and mid-cap firms
• Advantages: Lowest risk of concentration, broad industry participation
• Risks: Less benefit from the rise of industry giants

Choosing Based on Investment Goals

Long-term (10+ years): Prefer regionally diversified, lower-risk options like SOXX or 00891.

Mid-term growth (3-5 years): Consider tracking industry leaders like SMH, but be prepared for volatility.

Short-term trading: Use CFD tools for more flexible trading.

Detailed Comparison of Taiwan and US Semiconductor ETFs

Features of SMH

SMH manages assets of about $21.9 billion, making it the largest global semiconductor ETF. It tracks the MVIS US Listed Semiconductor 25 Index, which includes the top 25 US chip companies, with quarterly adjustments.

Top 10 holdings include NVIDIA and TSMC ADR, with weights of 24.36% and 12.89%, respectively, totaling over 37%. Due to NVIDIA’s recent stellar performance, its weight is close to the 20% cap, and upcoming adjustments may trigger selling pressure.

It pays annual dividends, with a management fee of 0.35%, high liquidity, suitable for investors optimistic about industry leaders’ future.

Features of SOXX

SOXX is a veteran fund with assets of about $15 billion. Its main difference from SMH is the 8% cap per stock, so NVIDIA’s weight is 10.91%, hitting the cap. Since it mainly focuses on US companies, TSMC ADR’s weight is only 4.24%.

This results in slightly lower performance over the past 5 years compared to SMH, as TSMC and ASML’s gains have been prominent in the industry. It also pays quarterly dividends with a 0.35% management fee.

Features of XSD

XSD, issued by State Street, has assets of only $1.54 billion, the smallest among the three. It adopts an equal-weight approach, holding 39 stocks, with the top stock (First Solar) at only 4.4%.

This setup limits the benefit from industry giants’ rallies, showing a performance gap in recent years. However, for investors prioritizing extreme diversification, XSD offers an alternative.

Quick ETF Comparison Table

Practical Investment Strategies

Account Selection

Taiwan Brokerage Custodial Account

• Pros: Direct TWD trading, simple process
• Cons: Higher fees, better for long-term holding

Online Brokerage Direct Account

• Pros: Some fee exemptions, lower trading costs
• Cons: Limited tools and leverage options, suitable for mid- to long-term

CFD Contract Account

• Pros: No trading fees, supports short and long positions, flexible leverage
• Cons: No actual stock ownership, cannot participate in shareholder meetings or dividends, suitable for short-term traders

Investment Decision Framework

1. Stock Picking: Prioritize tech leaders with high market share and innovation, e.g., TSMC, NVIDIA, ASML.
2. Diversification: Invest via ETFs rather than single stocks to reduce company-specific risk.
3. Entry Timing: Combine technical and fundamental analysis to buy at relatively low points.
4. Portfolio Strategy: Core long-term holdings combined with short-term trading to capture industry growth and market fluctuations.

Summary

Semiconductor ETFs provide a convenient way to invest in the industry. With explosive growth in AI applications, this sector’s growth momentum is expected to continue for years. Compared to picking individual stocks, ETFs make investment simpler and risk more manageable.

Depending on your investment horizon and risk tolerance, different options are suitable—conservative investors may choose SOXX or 00891; growth seekers may prefer SMH; those favoring extreme diversification can consider XSD.

Before investing, confirm your investment goals and risk appetite, select the most suitable account and ETF combination, and let your assets steadily grow in this wave of technological advancement.