Profit from the chip shortage with Semiconductor ETFs

Covid boosted demand for electronics but chip producers struggled to follow suit, creating a shortage that rippled through the semiconductor industry. Here’s how Semiconductor ETFs can help you play this event.

The chip shortage that rattled the industry

During the peak of the pandemic in 2020, people were unable to do the daily things they're used to, such as working at the office, hanging out in public places, or even jog in the woods. Fortunately for gamers, life in COVID-era became exciting again with the PlayStation 5 (PS5) launch in November 2020. It was an instant success with millions of enthusiasts lining up to buy Sony's golden egg. However shortly, the PS5 dried out of the market, and prices of the game console skyrocketed in secondary markets. So, what happened?

Apparently, there was a global chip shortage that disrupted businesses that rely on semiconductors, such as the automotive and consumer technology industries. As the crisis continued, its ripple effects stretched far beyond these industries. A recent study by Goldman Sachs (GS) shows that the semiconductor shortage impacted all kinds of businesses in some way, from coating products and concrete production to cooking appliances and beer production.

Why did the chip shortage happen?

Stay at home trends, online learning, and work at home boosted spending on consumer electronics. As orders began to pile up as manufacturers struggled to create enough chips to meet the new levels of demand. On the other hand, car companies reduced their production output during COVID-19 and canceled some of their chips orders. When demand for cars kicked in faster than expected, they couldn't get any.

Accidents and nature had also something to do with it. In February, power outages across Texas have shut down several semiconductor chipmakers’ plants such Samsung Electronics, NXP, and Infineon and a fire in March in Japanese chipmaker Renesas Electronics factory disrupted production for more than 100 days.

The supply crisis could also be attributed to the structural change in the industry. Several of the top semiconductor companies have turned “fabless,” (e.g. Nvidia, Apple, Qualcomm) which means that they only design the chips and the technology. They then delegate foundries to produce them. With this business model, existing foundries are struggling to handle the growing load at current capacities.  

Another factor that contributed to the shortage is Trump's decision to prevent the sale of semiconductors and other technology to Huawei. The move flooded Chip makers outside the US with orders from the Chinese firm.

How the chip shortage issue will be tackled?

The chip shortage has caused billions of dollars in losses, especially for electronic component manufacturers and automotive companies. The global issue has enticed governments and semiconductor manufacturers to set out plans for capacity expansions to meet demands.

Here are the latest 2021 efforts:

• Intel to Spend $20 Billion on 2 New Chip Factories in Arizona.
• US Senate passed a $52 billion bill to boost the national production of semiconductors.
• Taiwan Semiconductor Manufacturing Co has approved $2.89 billion in spending to increase capacity.
• TSMC will also spend $100 billion over the next three years to increase production capacity
• Samsung Electronics will expand capacity at Pyeongtaek campus
• SK Hynix said it will invest in the 8-inch foundry business to tackle global chip shortages. They will also revamp their M&A activities to acquire more capacity and plans to build four additional chip fabrication factories in a semiconductor cluster in Yongin, south of Seoul.
• United Microelectronics Corp. (UMC) will invest US$3.58 billion to expand capacity

The efforts will likely increase as activities go back to normal and cash flow levels allow it. According to the Boston Consulting Group (BCG), the industry will need to invest about $3 trillion in R&D and capital expenditure globally over the next 10 years across the value chain to meet the increasing demand for semiconductors.

How can I invest in semiconductors?

The demand for semiconductors will only increase in the coming years, with new 5G telecom networks, cutting-edge smartphones, IoTs, and growing electric vehicle production driving the growth.

As investments efforts pile up and the industry continues to flourish, semiconductor stocks will draw a lot of interest among individual and institutional investors. For investors betting on the industry's long-term prospects, there are a lot of companies to invest in.

Below is a list of the top 10 semiconductor companies across the world, based on their total 2020 revenues.

1. Intel (USA): $77.8bn
2. Samsung Electronics (South Korea): $52.2bn
3. Taiwan Semiconductor Manufacturing Co. (Taiwan): $45.5bn
4. SK Hynix Inc. (South Korea): $25.27bn
5. Broadcom Corporation (USA): $23.89bn
6. Qualcomm (USA): $23.53bn
7. Micron Technology (USA): $21.43bn
8. Applied Materials (USA): $17.2bn
9. Nvidia Corporation: $14.78bn
10. Texas Instruments Inc.: $14.46bn

Investors should keep in mind that the industry lives and dies by one motto: "Faster, Cheaper and Smaller". The competition between these giants is fierce and only the ones investing heavily in R&D will survive.

For that reason, Semiconductor ETFs can provide an opportunity to invest in the industry by owning a basket of global semiconductor companies. The exposure to different companies, countries and currencies acts as safety net against unprecedented events and volatility.

Top 10 largest Semiconductor ETFs by AUM:

1. iShares Semiconductor ETF: $7.50bn
2. VanEck Vectors Semiconductor ETF: $6.05bn
3. SPDR S&P Semiconductor ETF: $1.12bn
4. Invesco Dynamic Semiconductors ETF: $696mn
5. ProShares Ultra Semiconductors ETF: $289mn
6. Samsung KODEX Semicon ETF: $214mn
7. Global X China Semiconductor ETF: $180mn
8. Mirae Asset TIGER Semicon ETF: $132mn
9. First Trust Nasdaq Semiconductor ETF: $77.45mn
10. Invesco PHLX Semiconductor ETF: $65.41mn

Top Semiconductor ETF performers year-to-date:

1. ProShares Ultra Semiconductors ETF: +46.4%
2. Invesco Dynamic Semiconductors ETF: +27.3%
3. VanEck Vectors Semiconductor ETF: +25.1%
4. iShares Semiconductor ETF: +24.4%
5. SPDR S&P Semiconductor ETF: +20.3%
6. First Trust Nasdaq Semiconductor ETF: +17.9%
7. Global X China Semiconductor ETF: +17.1%
8. Invesco PHLX Semiconductor ETF*: +6.1%
9. MiraeAsset TIGER Semicon ETF: -2.2%
10. Samsung KODEX Semicon ETF: -2.7%

*Inception on June 11, 2014

Keep reading:

• Dividend tax hike in the UK: What you need to know?
• ETF markets in focus: August 2021
• Japan ETFs top this week

Find and compare over 7,000 ETFs with our free tools:

• ETF Screener
• ESG Investing
• Download the 2021 Trackinsight Global ETF Survey