Semiconductor ETF Investment Guide: Comparison of US and Taiwan Stock Market Options

As emerging applications such as AI and cloud computing flourish, the semiconductor industry has become a focal point in global capital markets. From the evolution of the personal computer era to the current wave of artificial intelligence, chips (as the “brain” of various electronic devices) play an increasingly important role in human life. Whether it is computing, data storage, or information transmission, all rely on semiconductor technology.

In view of this, investing through semiconductor ETFs has become the preferred choice for many investors to capture industry benefits. This article will introduce the main semiconductor ETF options in the Taiwan and US markets in detail and analyze how to select based on individual investment goals.

The Three Main Choices of US Semiconductor ETFs

The US stock market’s semiconductor ETF market is the most mature, with a scale far larger than other markets. The following three ETFs each have their own characteristics, and investors should evaluate according to their risk tolerance and investment horizon.

SMH: The Largest Semiconductor Fund Globally

SMH (VanEck Vectors Semiconductor ETF) is currently the largest semiconductor ETF in the world, with a fund size of $21.9 billion as of June 11, 2024. The fund tracks the MVIS US Listed Semiconductor 25 Index, comprising the 25 largest US-listed semiconductor companies by market cap.

Core Features: Market-cap weighted allocation, with a single stock weight cap of 20%. The index requires that at least 50% of revenue comes from semiconductor-related businesses, with quarterly adjustments to weights and constituents.

Looking at the holdings, NVIDIA and TSMC ADRs hold significant weights, with NVIDIA at 24.36% and TSMC at 12.89% as of June 2024. Other key holdings include Broadcom (7.35%), Qualcomm (4.98%), and other global semiconductor leaders.

Investment Characteristics: SMH focuses on tracking industry leaders, with a 10-year annualized return of 27.32%, outperforming the S&P 500 index. It has high liquidity and stable prices, suitable for investors optimistic about the long-term growth of semiconductor giants. However, due to concentrated weights, a decline in NVIDIA or TSMC can significantly impact the fund’s net asset value.

SOXX: US Market-Oriented Philadelphia Semiconductor ETF

SOXX (iShares PHLX Semiconductor ETF), established in 2001, is the oldest semiconductor fund in the industry, with a fund size of $15 billion. It previously tracked the Philadelphia Semiconductor Index but now follows the ICE Semiconductor Index, with 30 constituents.

Core Features: Free-float market cap weighting, with a maximum individual stock weight of 8%, stricter than SMH’s 20%. The fund mainly invests in semiconductor companies listed or primarily traded in the US, with limited holdings in non-US listed companies.

For example, although TSMC and ASML have large market caps, their holdings in SOXX are much lower due to their primary listings in Taiwan and the Netherlands. As of June 2024, NVIDIA’s weight in SOXX is only 10.91%, and TSMC’s is just 4.24%.

Investment Characteristics: Higher diversification of individual stock risk, but its performance over the past five years has lagged behind SMH, mainly because it missed out on the strong gains of TSMC and ASML. Suitable for investors who believe in the long-term leadership of US companies or prefer regional concentration.

XSD: Equal-Weighted Focus on Small-Cap Stocks

XSD (SPDR S&P Semiconductor ETF), issued by State Street in 2006, tracks the S&P Semiconductor Select Industry Index, with a fund size of $1.54 billion. It includes 39 companies, all equally weighted.

Core Features: Constituents mainly come from the semiconductor industry within the S&P 500, excluding TSMC and ASML. Weights are equally distributed, with periodic rebalancing, leading to a less stable holding structure. Currently, the largest holding is First Solar, with a market cap of only $30 billion, much smaller than NVIDIA.

Investment Characteristics: Since most constituents are small- and mid-cap companies, risk diversification is optimal, but performance often lags behind industry leaders during market rallies. Suitable for conservative investors seeking maximum diversification and willing to sacrifice some returns.

Comparison of the Three Funds

Layout Options for Taiwan Semiconductor ETF

In Taiwan’s stock market, tech stocks account for over 70%, with more than 70% related to TSMC’s supply chain. Simply put, investing in broad Taiwan ETFs like 0050 and 006208 already provides semiconductor exposure.

Pure Semiconductor Themed Taiwan ETFs

If you want to focus solely on semiconductor industry investments, the following options are available in Taiwan:

00941 China Trust Upstream Semiconductor ETF: The largest Taiwan semiconductor ETF, mainly invested in overseas semiconductor equipment and materials companies, lacking exposure to wafer foundries and IC design firms with higher profit margins, thus limited growth potential.

00891 China Trust Key Semiconductor ETF: Invests in 30 Taiwan-listed semiconductor companies (with over 50% revenue from semiconductors), with a maximum individual stock weight of 20%. Unique in that it does not use pure market-cap weighting but combines dividend yield, market cap, and ESG factors. It covers upstream, midstream, and downstream industries, offering good diversification and long-term stability, though short-term performance may lag the market.

00830 Cathay Fubon Philadelphia Semiconductor ETF: Tracks the Philadelphia Semiconductor Index, including globally renowned semiconductor companies, similar in nature to US SOXX but priced in TWD. Investors can choose based on their views on exchange rate risk and TWD demand.

Investment Suggestions for Taiwan Semiconductor ETFs

Compared to 00941’s equipment and materials focus, 00891 and 00830 are more worth considering, as both emphasize profitable key semiconductor companies. If you prefer pure Taiwan stocks, 00891 offers more stable performance; if you are willing to accept exchange rate risk for higher growth, 00830 provides full exposure to the Philadelphia Semiconductor Index.

How to Evaluate and Select Semiconductor ETFs

The semiconductor industry is a global division of labor ecosystem, with leading companies distributed across the US, Taiwan, Europe, and other regions. No single index can comprehensively cover the entire industry. Selection should be based on the following factors:

Differences in Index Selection Logic

Market-cap weighted indices like SMH are suitable for investors who believe in “the big get bigger.” These indices focus on industry leaders, effectively capturing growth benefits from leading companies, but individual stock risk is concentrated. If a leading company faces difficulties, the fund’s NAV can fluctuate significantly.

Free float market cap indices like SOXX tend to focus on companies within a specific region (mostly the US). This approach reduces individual stock risk but introduces regional concentration risk. If the US loses its semiconductor leadership, investors could suffer major losses—an example being the decline of Japan’s semiconductor industry in the 1980s.

Investment Horizon and Risk Tolerance

For very long-term investments over 10 years (such as retirement planning), free float market cap ETFs like SOXX are preferable, as their lower concentration offers more stable risk management. For medium-term growth capture of industry leaders, SMH is more attractive.

Currently, geopolitical tensions and de-dollarization trends coexist globally. Diversified investments to avoid over-concentration in a single market are now essential.

Investment Strategies and Account Options for Semiconductor ETFs

Most major semiconductor companies are traded on US exchanges, making US brokerage accounts the most convenient way to access this sector. Investors can choose different account types based on trading purposes:

Taiwan Brokerage Custodial Accounts

Trading US stocks through domestic brokers allows direct use of TWD and familiar interfaces. The downside is relatively higher transaction fees, making it more suitable for long-term holding investors.

Online Brokerage Accounts

Many international online brokers offer commission-free or low-cost US stock trading with high convenience. Limitations include potential restrictions on trading tools and leverage, suitable for medium- to long-term planning.

Derivatives Accounts

CFD (Contract for Difference) accounts offer commission-free trading, two-way trading (long and short), and high leverage, making them suitable for short-term traders. However, CFD trading does not involve actual stock ownership and does not entitle holders to shareholder meetings or dividends.

Practical Strategies for Semiconductor Investment

Focus on Innovative Leaders

Choose companies focused on technological innovation and market leadership, such as TSMC in Taiwan, Intel in the US, and ASML in the Netherlands—these represent the future direction of the industry.

The Importance of Diversification

Investing via semiconductor ETFs inherently provides risk diversification, as each fund typically includes dozens of industry leaders, effectively mitigating individual company risks. Compared to individual stocks, ETFs offer a safer industry allocation.

Combining Technical and Fundamental Analysis

When deciding buy or sell points, combine technical analysis with fundamental research. Monitor semiconductor cycles, capacity utilization, end-market demand, and other fundamental factors, while also considering stock price technical patterns to improve decision quality.

Flexible Strategies Combining Long and Short Positions

Investors confident in the long-term growth prospects of the semiconductor industry can adopt a core holding plus tactical trading approach. Establish a long-term ETF position to benefit from industry growth, while using short-term volatility for tactical operations to maximize returns.

Summary

With the continuous evolution of AI, IoT, 5G, and other cutting-edge applications, demand for semiconductors is expected to sustain growth for years. Compared to buying multiple individual stocks, semiconductor ETFs offer a simpler trading process and more diversified risk, making them the preferred tool for ordinary investors to participate in this industry.

Based on individual investment horizon, risk tolerance, and views on the global semiconductor landscape, investors should reasonably allocate among leading ETFs like SMH, US-oriented SOXX, and Taiwan options such as 00891 and 00830. Seizing this wave of semiconductor industry growth and wealth opportunities, and aligning asset growth with industry development, is the key focus for investors today.