Semiconductors Drive New Tech Advances

Semiconductors, also referred to as semis or chips, are used in an extensive range of products in computing, telecommunications, gaming, transportation, clean energy and healthcare. They are the brains of modern electronics and the drivers of technological innovation. Over the past decade, semis have also been the drivers of the broader technology sector’s upside and the beneficiaries of evolving sources of demand. As future technologies arise, such as the cloud, the internet of things (IoT), artificial intelligence (AI), virtual reality (VR), autonomous driving, wearables, smart technology, drones and advanced wireless networks (5G), we are bullish on the future of the semiconductor industry.

In a risk-off market, indiscriminate selling often fuels share price volatility. Semis were among the stocks hit hardest during the COVID-19 selloff this past March; however, most chip stocks have made a resilient comeback. This is potentially good news for semiconductor stocks and investors seeking outsized returns in what many anticipate to be a challenging and unpredictable market over the near-term.

The global pandemic and ensuing stay-at-home trends have been boosting the demand in the past and adoption of products that use chips. For example, certain semiconductor companies, such as Advanced Micro Devices, Inc. (AMD) and Nvidia Corp. (NVDA), are significant players in the booming global video gaming and eSports industry, too.¹ These chip makers develop and manufacture semiconductor chips that define the graphic experience of the player and are crucial to the gameplay experience.

Global Semiconductor Industry Revenue Growth

Source: World Semiconductor Trade Statistics. As of 9/6/2020. Past performance is not a guarantee of future results. Actual performance can differ from projected performance. *Indicates World Semiconductor Trade Statistics’ forecasted growth.

During periods of high demand, upturns occur and tight supply, or even shortages, generally lead to higher prices and revenue growth. According to the World Semiconductor Trade Statistics, it is expected that worldwide semiconductor sales will grow by 3.3% this year, totaling $426 billion dollars, and by 6.2% in 2021.

While actual results can hardly be predicted, we expect this dynamic industry to continue to grow and innovate as technology becomes more and more pervasive in everyday life. Investors seeking to benefit from this technological acceleration and proliferation can gain exposure to this space through semiconductor exchange-traded funds (ETFs). ETFs can help reduce individual stock risk by providing broad access to a basket of companies, but investors should pay attention to how these baskets are constructed.

VanEck Semiconductor UCITS ETF (SMH) seeks to replicate the performance of the MVIS® US Listed Semiconductor 10% Capped Index, which is comprised of the 25 largest and highly liquid U.S. listed semiconductor companies. SMH is a pure-play semiconductor industry ETF, meaning that each company must generate at least 50% of their revenues from the production of semiconductors and/or semiconductor equipment.