Key Takeaways:

• China is building a domestic semiconductor ecosystem across the entire value chain.
• Tighter export controls have accelerated demand for domestic chip alternatives.
• Sovereign capital is helping fund China's push for semiconductor self-sufficiency.
• Traditional semiconductor funds provide little to no exposure to this theme.
• SMHC offers targeted exposure to companies driving to China's semiconductor buildout.

Most semiconductor allocations today are concentrated in US and Taiwanese companies, capturing the design and fabrication layers of the global supply chain. But there’s a completely separate semiconductor ecosystem that they’re missing.

Driven by sovereign capital and structural forces that have only grown stronger over the past several years, China is building a domestic semiconductor industry spanning chip design, manufacturing, equipment and packaging. For investors, that means exposure to companies largely absent from traditional semiconductor allocations.

The VanEck China Semiconductor ETF (SMHC) is designed to access that opportunity directly. It tracks the MarketVector China Semiconductor 25 Index, which targets 25 of the largest and most liquid Chinese companies across the semiconductor value chain, from design and manufacturing to advanced packaging. The companies in this index do not appear in conventional semiconductor or broad China equity strategies, making this exposure additive to most portfolios.

The scale of this ambition is perhaps best illustrated by Huawei. Despite being cut off from U.S. chips and chip-making technology, Huawei has continued to develop its own semiconductor capabilities through its HiSilicon design unit, producing chips that power its smartphones, networking equipment and AI infrastructure. Huawei is privately held and not directly investable. However, its trajectory reflects the broader push across China's semiconductor industry, and the companies supplying that industry are publicly traded.

The investment case rests on three reinforcing forces: the scale of China's domestic semiconductor build-out, the push for localization created by US export controls, and the sovereign capital backing the entire effort.

China Is Building the World's Largest Chip Manufacturing Base

Semiconductors are the foundational building blocks of every electronic device, from smartphones to data centers to cars, and China sits at the center of this global industry both as a consumer and, increasingly, as a producer.

In 2025, China was the world's single largest spender on semiconductor manufacturing equipment. This reflects how much fabs are spending on the physical tools used to build chips, including lithography systems, etch tools, and deposition equipment. It is a measure of where the industry's infrastructure is being constructed, and the answer is overwhelmingly China.

China Leads 2025 Spend on Semiconductor Manufacturing Equipment

Source: SEMI as of April 2026. Past performance is no guarantee of future results. Not intended as a forecast or prediction of future results. For illustrative purposes only.

That level of investment indicates a deliberate national priority. China consumes a substantial share of all semiconductor devices used in locally assembled electronics globally, but its domestic production has historically fallen well short of that consumption. Closing that gap has become one of the most consequential industrial policy objectives of the current era, and the financial results are already showing up. The combined revenues and market capitalizations of SMHC's index constituents have grown dramatically since 2019, driven by domestic demand and forced localization.

Domestic Tailwinds Drive Up SMHC Constituent Revenues and Market Caps

Source: VanEck, MSCI. Chinese semiconductor companies represented by Semiconductor and Semiconductor Manufacturing companies in the MSCI China IMI Index as of 5/31/2026. See important disclosures and index descriptions at end.

China’s Semiconductor Model Stands Apart from the U.S.

Understanding how the U.S. and Chinese semiconductor ecosystems differ structurally helps illustrate why this opportunity is distinct from existing semiconductor allocations.

The U.S. model is built around design concentration and manufacturing outsourcing. A small number of dominant fabless companies, including Nvidia, Qualcomm, Broadcom, and AMD, design the world's most advanced chips and outsource their fabrication to foundries in Taiwan, primarily TSMC. The equipment those foundries use comes largely from U.S. and European suppliers, while packaging and testing happens across Asia. The U.S. captures extraordinary value in the design layer but is structurally dependent on foreign manufacturing for everything downstream.

China is building something different. Rather than specializing in one layer of the stack, China is constructing every layer simultaneously and domestically, covering fabless design, foundry capacity, manufacturing equipment and advanced packaging. The goal, as articulated through state policy, is a self-sufficient semiconductor supply chain with zero foreign dependency. That goal remains distant, but the trajectory is clear and the investment is sustained.

Source: VanEck, MSCI.

The practical implication for investors is that these are two separate universes of companies and no overlap between SMHC and existing U.S.-listed semiconductor funds. An investor who holds conventional semiconductor exposure has none of the Chinese companies capturing this domestic build-out.

Restrictions Accelerated China’s Domestic Chip Build-Out

The relationship between US export controls and China's semiconductor investment is one of the more counterintuitive dynamics in markets today. The conventional expectation would be that restrictions slow China's development. The evidence suggests the opposite.

Since 2019, the U.S. has progressively tightened controls on the technology China can access, including adding Huawei and SMIC to the Entity List, restricting access to U.S. technology and suppliers. This expanded in October 2022 with sweeping controls on advanced chip exports and semiconductor manufacturing equipment. The U.S. then coordinated with the Netherlands and Japan to restrict ASML and Tokyo Electron equipment sales in 2023, before expanding controls further in 2024 and 2025. At each step, China's domestic equipment spending has accelerated rather than contracted, creating stronger incentive for Chinese companies to localize the supply chain.

China’s Equipment Spending Grew as Export Controls Expanded

Source: VanEck, SEMI as of April 2026. These are not recommendations to buy or to sell any security. Securities and holdings may vary. For illustrative purposes only.

The mechanism is straightforward. Each restriction creates a procurement mandate that may benefit a local provider. Chinese fabs that can no longer source ASML lithography systems may source from NAURA. Chinese data centers that cannot purchase Nvidia GPUs may source from Cambricon. Chinese telecom operators have been directed to remove all foreign semiconductors from their networks by 2027. Every foreign supplier locked out of the Chinese market creates a potential customer for a domestic Chinese company. The geopolitical pressure that makes this investment feel risky is the same force making the revenue opportunity structural and durable.

Foreign Supplier Restrictions Create Domestic Beneficiaries

Source: VanEck. These are not recommendations to buy or to sell any security. Securities and holdings may vary. For illustrative purposes only.

China and U.S. Take Different Paths to Semiconductor Funding

Underpinning China’s build-out is a level of state financial commitment that has no real equivalent in Western industrial policy.

China's National IC Fund has committed approximately $98 billion across three phases since 2014, including a $47.5 billion commitment launched in May 2024. That capital is deployed through directed procurement, subsidized fab construction, and preferential financing from state banks. The scale is significant, but so are the structural risks: state-directed investment at this magnitude has historically produced overcapacity and boom-bust cycles, and below-market financing can sustain uneconomic capacity over time.

How Scale, Structure and Risks Differ

Source: CHIPS and Science Act (Public Law 117-167), Commerce Office of Inspector General, Status Report OIG-25-021-I, Document 79 (2022 SASAC directive), State Council Guo Fa [2020] No. 8, Beijing Municipal Administration for Market Regulation on May 24, 2024. For illustrative purposes only.

The contrast with U.S. industrial policy is meaningful. The CHIPS Act appropriated $52.7 billion in 2022, of which $39 billion was earmarked for manufacturing incentives. Grants are capped at 5 to 15% of total project cost, requiring private co-investment to unlock the rest, and awards are subject to performance conditions and contractual guardrails. As of January 2025, approximately $33.7 billion has been awarded. The first award was not finalized until September 2024, more than two years after enactment.

The two approaches differ in scale, structure, and risk profile. China's capital is larger and faster-moving, while the U.S. model is more conditional and slower to deploy. Both carry real tradeoffs.

Invest in China’s Semiconductor Build-Out with SMHC for Pure Play Exposure

SMHC tracks the MarketVector China Semiconductor 25 Index, a rules-based index designed to provide pure-play exposure to the Chinese semiconductor industry.

Eligibility begins with a revenue purity screen, which requires companies to be headquartered or incorporated in China or Hong Kong and derive at least 50% of its revenues from semiconductors or semiconductor equipment. This ensures that every constituent is a meaningful participant, rather than a diversified technology conglomerate with incidental chip exposure.

From this universe, 25 companies are selected based on a combination of scale and liquidity, to ensure the portfolio remains investable. Constituents are weighted using a modified free-float market capitalization approach, with individual caps and concentration limits to balance exposure to the largest names with representation across the broader opportunity set. The index is reconstituted semi-annually and rebalanced quarterly.

For investors looking for access to China's domestic semiconductor build-out, the VanEck China Semiconductor ETF (SMHC) offers a direct path to a theme that remains largely absent from traditional semiconductor allocations.

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