SEMICONDUCTOR INDUSTRY

The semiconductor industry is a US$570 billion (Semiconductor Industry Association) market, which underlies our increasingly technologically-driven society. The development of semiconductors is a complex process made up of researchers, engineers, designers, and producers of semiconductor chips.

Semiconductor chips are all around us you could probably find at least 100 semiconductor chips within your own home as almost every electronic product contains them—including smartphones, laptops, televisions, gaming consoles, household appliances, vehicles, machinery, weaponry, and many other uses.

So, what exactly are semiconductors? In simple terms, semiconductors control and manage the flow of electricity in equipment and devices. Most semiconductors are composed of crystals made of several materials.

How are semiconductor chips made? Semiconductors require an extreme amount of precision to create them. They are essentially manufactured at an atomic level, which requires incredibly clean working environments, expensive facilities, and equipment. The process is arduous, with R&D and manufacturing costs making up the lion’s share of the cost structure for a semiconductor chip.

The life cycle stages for the semiconductor industry include the following stages:

The semiconductor industry is a US$570 billion (Semiconductor Industry Association) market, which underlies our increasingly technologically-driven society. The development of semiconductors is a complex process made up of researchers, engineers, designers, and producers of semiconductor chips.

Semiconductor chips are all around us you could probably find at least 100 semiconductor chips within your own home as almost every electronic product contains them—including smartphones, laptops, televisions, gaming consoles, household appliances, vehicles, machinery, weaponry, and many other uses.

So, what exactly are semiconductors? In simple terms, semiconductors control and manage the flow of electricity in equipment and devices. Most semiconductors are composed of crystals made of several materials.

How are semiconductor chips made? Semiconductors require an extreme amount of precision to create them. They are essentially manufactured at an atomic level, which requires incredibly clean working environments, expensive facilities, and equipment. The process is arduous, with R&D and manufacturing costs making up the lion’s share of the cost structure for a semiconductor chip.

The life cycle stages for the semiconductor industry include the following stages:

An overlooked aspect of the semiconductor market is the interplay between geopolitics and economics. Industry fundamentals are largely driven by economic factors, however, the political tension off the shore of southeast China creates some investment risk.

Taiwan is an island nation that China claims it has ownership of, and happens to be the definitive leader in advanced semiconductor chip manufacturing capacity. The U.S. has maintained that it would defend Taiwan from any aggression made by mainland China on the island, however, the risk that a substantial portion of advanced semiconductor chip production falls into the hands of its economic rival has caused the U.S. to consider onshoring its chip production.

In August 2022, the U.S. supercharged its ability to design and manufacture semiconductor chips by signing into law: the U.S. CHIPS and Science Act—providing a whopping $280 billion of new funding to boost domestic research and manufacturing of semiconductors in the U.S.

Subsequently, in October 2022, the Biden administration published a set of export controls to cut China’s access to certain semiconductor chips in an attempt to slow the country’s technological and military advances.

The battle for semiconductor supremacy is well underway, and any geopolitical calamities could create supply shortages that could foster extreme pricing swings and market shifts.

The semiconductor industry can be characterized by one word: cyclicality. This means that the sector goes through cycles of mismatched supply-demand fundamentals.

In a downturn, demand dries up leading to an oversupply of chips. Inventories build, and prices fall as new capacity additions by foundries are curbed.

Eventually, the downturn ends in an upturn as limited capacity additions lead to underwhelming supply growth. Demand will ultimately outpace constrained supply and lead to a shortage of chips, rising prices, and longer lead times.

Overall, the long-term growth of the semiconductor industry is underpinned by the demand for electronics. Computing, communications, and consumer electronics are all fast-growing end markets that rely on a greater amount of semiconductor production. The driving force of the next wave of technologies includes areas such as AI, quantum computing, and robotics—all of which require a substantial amount of semiconductor supply.

For Canadians to gain investment exposure to the growing semiconductor industry, look no further than Global X Semiconductor Index ETF (CHPS) (formerly Horizons Global Semiconductor Index ETF).

CHPS tracks the Solactive Capped Global Semiconductor Index at a modest 0.55% management expense ratio as at December 31, 2022 while paying out an almost 1.0% annualized distribution yield.

The ETF came to market in June 2021 and has assets under management (AUM) of $51.5 million as at May 30, 2023.

CHPS is well diversified within the semiconductor space, holding a range of designer and fabrication companies across different geographies. Its top ten holdings* are:

*As at May 26, 2023

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Published June 1, 2023