Given how semiconductor chips are the basic building block of our modern technological existence and will play an ever-greater role in our uber-connected future, you might think the production of the key component of everything from cars to cellphones would be booming.
But the global pandemic and increasing demand for chips have caused a global semiconductor shortage, best epitomized by some auto makers cutting production and being forced to roll some new vehicles out of their plants into storage because they are undrivable until they receive the multitude of chips they require.
The current semiconductor shortage, which is expected to last well into 2022, has highlighted for investors just how important the sector is, how few big producers there are and, to add some geopolitical intrigue, how risky the future may be.
For Canadian ETF investors, there are limited domestic options to play the semiconductor theme. However, one fund provider recently stepped up to capture some of that interest.
In June, Horizons ETFs Management (Canada) Inc. launched three emerging technology thematic funds (hydrogen, lithium and semiconductor) with the latter gaining the most attention among investors.
”There is this well-known thing is that data is the new oil and if that’s true, you can identify the fact that data centres and all the things that semiconductors go into which is everything in the tech world and every durable good you can imagine that is slowly getting connected,” says Hans Albrecht, a Horizons ETFs portfolio manager.
The Horizons Global Semiconductor Index ETF (CHPS-T). launched on June 21, has a 0.45 per cent management fee and has to date attracted net assets of $8.4-million to date. It also features currency hedging. CHPS began trading at $25 a unit and has generally traded above its initial price, reaching a high of $27.83 recently.
The fund’s stated goal is to offer exposure to global, publicly listed companies involved in the production of semiconductors and the equipment used to make them. It looks to mirror the performance of the Solactive Capped Semiconductor index. Solactive, which creates custom investment indices, estimates the semiconductor market will reach US$522-billion this year, 12.5 per cent higher than in 2020, driven by continued demand for chips used for consumer products, computing, 5G, and automotive production.
”I have noticed that [CHPS] has dropped off about 10 per cent in the last few weeks and that is not too unusual because the theme was not exactly born yesterday,” says Yves Rebetez, an ETF analyst and partner of Credo Consulting Inc. of Oakville, Ont.
He likened the rise in interest of semiconductors to the lumber shortage that spiked earlier this year before subsiding. The analyst does expect the semiconductor theme – and investor interest – to last far longer than the pandemic-driven lumber shortage.
The Horizons CHPS fund, currently the only Canadian semiconductor-focused ETF, includes big producers such as Taiwan Semiconductor Manufacturing Co. Ltd., which makes the world’s most advanced chips, as well as Nvidia Corp., Applied Materials Inc., Intel Corp. and Asml Holdings N.V.
The international flavour of CHPS holdings reflects the fall from the dominance of U.S. manufacturers from roughly half of world chip production in the 1980s to about 12 per cent today.
Expect that to change as western nations move to bring back production of chips for strategic national security reasons – a situation that has been highlighted of late given the critical role that embattled Taiwan plays in the production of the world’s most sophisticated and powerful semiconductors.
It will be a long process, even if China backs off from its aggressive moves toward Taiwan, which is considered by Beijing to be a Chinese province.
”While the U.S. is trying to increase domestic chip production, foundries require billions of dollars and many years to build, so the problem is not going away any time soon,” says Neena Mishra, director of ETF research with Zacks Investment Research in Chicago.
As well, there is “an acceleration in the industry consolidation” she notes, which includes Nvidia’s plan to acquire chip designer Arm Holdings and the near-complete deal by Advanced Micro Devices to purchase Xilinx as well as Western Digital’s plan to merge with Japan’s Kioxia.
Ms. Mishra recommends ETF investors consider a handful of U.S.-listed funds, each with slightly different mandates and asset mixes.
One is the iShares Semiconductor ETF (SOXX-Q), with a management expense ratio (MER) of 0.43 per cent and US$7-billion in assets. Its top holdings include Intel, Broadcom Inc. and Nvidia. SOXX has produced a return of about 19 per cent so far this year, and 44 per cent over the past 12 months. (All data is from Morningstar as of Oct. 7).
There’s also the VanEck Vectors Semiconductor ETF (SMH-Q), which tracks the overall performance of the 25 largest, U.S. listed companies that produce semiconductors. It has an MER of 0.35 per cent, US$6-billion in assets and has returned 18 per cent so far this year and 43 per cent over the past year. A few of it stop holdings include Taiwan Semiconductor Manufacturing, Nvidia and Asml.
The SPDR S&P Semiconductor ETF (XSD-A), with an MER 0.35 per cent and US$1.1-billion in assets, has returned 17 per cent year-to-date and about 50 per cent over the past 12 months. Some of its top holdings include SunPower Corp., Semtech Corp. and Lattice Semiconductor Corp.
One more suggestion she has is the relatively new Invesco PHLX Semiconductor ETF (SOXQ-Q), with an MER of 0.19 per cent and assets of US$64-million. Its top holdings are Texas Instruments, Intel and Broadcom. The ETF is up about 1 per cent since it launched in early June.
The funds “are all excellent ways to get diversified exposure to this high growth space,” Ms. Mishra says.