Investing in semiconductor stocks and funds in 2023

From virtual reality headsets to self-driving cars, the use of technology is everywhere. And it will only likely increase. Powering many of the high-tech products available on the market are semiconductors, electrical conduit materials that have become core components of electronic devices. For example, mobile phones, ATMs, LED light bulbs, gaming consoles, and sometimes even rice cookers require semiconductor materials to function.

With demand for semiconductors set to increase over the next decade, analysts predict the industry’s value could reach $1 trillion by 2030. So, how can investors put money to work in this growing market?

We’ve created this handy beginner’s guide to help you better understand the potential behind semiconductors. Plus, we’ve identified some popular investments you may want to consider.

Key stats on the semiconductor industry:

Increasingly, companies are joining forces to provide seamless customer experiences, creating connected ecosystems that transcend physical and virtual worlds. For example, a customer can use hologram-powered virtual reality sets to check out a hotel in Italy before making reservations. Or luxury perfume companies like Byredo are giving customers a chance to create unique physical scents by mixing digital ingredients. The one thread connecting these experiences? Technology devices.

Whether e-commerce, telework, or the metaverse, nearly every industry feels the effects of the technology revolution. According to Bloomberg’s estimates, the metaverse alone could become an $800 billion market by 2024.

As these changes unfold, financial analysts believe growth for semiconductor companies is bound to increase. And they are likely correct, as these stats show:

• Global semiconductor revenue could reach $600 billion in 2022, according to estimates, up about 8 percent from 2021.
• The top three industries driving semiconductor revenue growth: Wireless, automotive, and Internet of Things, according to data from KPMG.
• Hybrid electric vehicles can have up to 3,500 semiconductor chips, with an average value of around $1,000.
• The semiconductor industry sold a record 1.15 trillion semiconductor chips in 2021, according to the Semiconductor Industry Association (SIA).
• In 2021, Samsung’s semiconductor revenue reached about $73 billion, up 28 percent from the previous year.

Sources: U.S. International Trade Commission, Gartner, KPMG, Semiconductor Industry Association

A brief history of the semiconductor industry

In the middle of the twentieth century, electronic devices made to carry out simple tasks required considerable computational power that could take up entire rooms. By 1965, Dr. Gordon Moore, American scientist and co-founder of Intel, predicted that the number of transistors that could fit in one square inch of an integrated circuit would double every two years. This theory became known as Moore’s Law.

With the exponential growth of microprocessors, machines that run on semiconductors have become smaller, faster, cheaper, and more powerful. And more than 50 years later, Moore’s Law remains the benchmark for research and development in the semiconductor industry.

Early in 2022, Apple unveiled the M1 Ultra chip, dubbing it “the world’s most powerful chip for a personal computer.” Likewise, other companies such as AMD, IBM, Jujitsu, and Sunway, among others, have made strides in creating chips that have pushed the limits of computing power.

Although some skeptics believe Moore’s Law will eventually peak, others predict scientists and engineers will find alternatives to make computers even more powerful. But, for now, semiconductor companies continue to fire on all cylinders.

The impact of the CHIPS Act on the semiconductor industry

The CHIPS and Science Act of 2022 extends $52.7 billion in direct funding and tax incentives for the research and development of semiconductors. According to the Senate, the program is “critical to the economic growth and national security of the United States.”

Historically, eastern Asia has produced about 75 percent of the world’s semiconductors. In contrast, U.S. semiconductor capacity is about 12 percent of the global supply. In particular, Chinese production of chips has surged over the last three decades:

Source: Semiconductor Industry Association

What’s more, recent supply chain disruption, product shortages, cybersecurity threats, and trade wars have prompted lawmakers to strengthen domestic semiconductor production after decades of relying on foreign companies.

By designing and manufacturing semiconductors in-house, the U.S. aims to produce semiconductors at greater speed while establishing tighter quality control standards. Besides creating thousands of jobs, this new act attempts to accelerate innovation and solidify the nation’s ranking in the global tech space.

Additionally, lawmakers have directed a portion of the act to improve the education of STEM fields among K-12 students, preparing future generations to partake in the growth of the tech industry.

Analysts believe the CHIPS Act could fundamentally shift the competitive balance between Asian and North American semiconductor operations.

How to invest in semiconductor stocks and funds

Like other thematic investing types – such as investing in space, blockchain, or artificial intelligence – retail investors have access to exchange-traded funds (ETFs). These funds offer a convenient and efficient way to gain exposure to a basket of stocks in a specific industry, like semiconductors.

For example, the VanEck Semiconductor ETF (SMH) tracks an index of 25 global companies involved in semiconductor manufacturing. Its biggest holdings include Taiwan Semiconductor Manufacturing (TSM), NVIDIA (NVDA), and Texas Instruments (TXN).

Other popular ETFs with semiconductor exposure include the SPDR S&P Semiconductor ETF (XSD) and the Invesco Dynamic Semiconductors ETF (PSI).

Although individual stocks often carry greater volatility, more experienced investors prefer selecting specific names hoping to generate greater returns. Below we’ve outlined some of the biggest semiconductor companies based on market capitalization.

Top semiconductor stocks (by market capitalization)

(*All data as of October 2022.)

When investing in individual semiconductor companies, it’s also essential to consider the makeup of the industry. There are three categories:

• Semiconductor manufacturers have production facilities and produce semiconductors or contract manufacturing for customers.
• Brand holders have well-known brands, supported by large marketing budgets, but often outsource production to the companies in the first category.
• Suppliers of components do not produce semiconductors. Instead, they supply manufacturers with production equipment and various testing services.

The future of the semiconductor industry

Investing in the semiconductor industry provides long-term opportunities. As the industry evolves and technology transforms how we live and work, demand for semiconductors will likely continue. According to analysts, that trend makes investing in semiconductor companies compelling.

However, like any other thematic investment, there are also potential risks. So before investing, consider reviewing all available information to determine how semiconductors fit into your financial strategy.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.