Investors are rushing to the VanEck semiconductor ETF as demand continues to outstrip supply for the highly sought-after computer component.
The VanEck Vectors Semiconductor UCITS ETF (SMH), the first of its kind in Europe, has been a highly sought-after ETF having gathered $190m assets under management (AUM) since launch in December 2020.
In particular, SMH saw its AUM spike 23.1% in the week to 26 February courtesy of $49m inflows, according to data from Ultumus. This jump was despite a 7% fall in returns during last week’s tech sell-off.
The strategy’s popularity is based on a simple line of reasoning; semiconductors are a critical component in most IT manufactured goods, they are in short supply and demand is growing.
With entire countries told to work from home in 2020, computer sales rose at their fastest rate in a decade. Likewise, datacentres had to drastically expand their capacity to cope with the shift to video calling and on-demand film streaming while manufacturers had to deal with bulk orders for semiconductors as Sony and Microsoft launched their new games consoles.
With many of these pressures still in play, demand is set to continue rising as countries leave lockdown, with vehicle production and portable electronics set to recapture consumer favour.
Furthermore, the recent surge in popularity of cryptocurrencies has created a need for ‘mining’ to occur on a wider scale, a process only made possible by a rapid expansion of digital currency architecture – including blockchain software and computing hardware.
Compounding these pressures is the fact that while demand continues to grow, the product’s supply is not quite as fluid. While many products can see input costs rise amid periods of high demand, semiconductors are not just becoming more expensive – the material supply just does not exist to adequately meet demand.
A key reason for this is that only two companies can create the highest-spec semiconductors – South Korea-based Samsung and Taiwan-based TSMC – and the factories needed to manufacture these components cost tens of billions of dollars to build.
The effect of this dynamic is currently the subject of several worrying headlines including a number of factory closures from Ford, GM and Stellantis due to semiconductor shortages which IHS Markit estimated will delay the production of almost one million vehicles during the first quarter.
Also, Microsoft, Nintendo and Sony are now all lacking the necessary components to build their gaming consoles, and, despite producing semiconductors, Samsung are now facing shortages that will hamper their rate of smartphone production.
Aside from benefitting broadly from strong demand and rising semiconductor prices, SMH will be buoyed by TSMC’s expansion plans.
Claiming a 10.7% weighting, TSMC is the second-largest holding in SMH. The ETF will benefit in the long run from this allocation as TSMC announces its plans to spend $28bn on new factories next year.
Additionally, in recognition of the semiconductor supply issue – and realising the strategic importance of these components – US President Joe Biden has signed an executive order that mandates a review of critical supply chains, such as that of semiconductors.
Furthermore, US manufacturers are lobbying the government to subsidise the country’s domestic semiconductor production.
Should these efforts bear fruit, the US relying more heavily on its companies would benefit SMH, given that the ETF has a 74.7% weighting towards the US.