Investing in semiconductor ETFs is an alternative to individual tech stocks. ETFs offer a strategic advantage for those looking to tap into the potential of the semiconductor industry without the heightened volatility that individual stock picks can bring. This not only mitigates the impact of any single company's performance but also captures the sector's overall growth.

■ Investors shift from individual stock selection to thematic investment

Most semiconductor industry segments have seen gains in 2023, including manufacturing equipment, semis materials, and autonomous driving chips, not just AI chip companies represented by Nvidia.

Investors piled into semiconductor ETFs this year, pushing the market size to $32 billion in assets under management. That figure doubles to $64 billion when including themes where sectors overlap -- AI, 5G, metaverse, autonomous and electric vehicles, and robotics.

Different from in-depth analysis of each individual company's prospects, semiconductor ETFs present a more balanced investment approach, harnessing the collective momentum of the industry's key players.

For semiconductor ETFs, the fee structure is quite competitive. Among the top 15 largest ETFs in this segment, six feature an identical expense ratio of 0.35%, the lowest relative to other peers.

■ Japan Semiconductor ETF Outperforms This Year

In 2023, the Global X Japan Semi ETF (2644 JP) outperformed, delivering an 86% return compared to the average 58% seen by the top 15 semiconductor ETFs. The standout performance was heavily influenced by regional investment strategies; the emphasis on Japanese semiconductor entities was a distinguishing feature. The prominence of these Japanese companies within the portfolio may have been advantageous, especially in light of tensions between China and the US. Disco (up 173% this year), Advantest (122%) and Renesas Electronics (113%) contributed the most to 2644 JP's outperformance, benefiting from Japan's strengths in high-end semiconductor materials (photoresists, wafers, target materials, etc.)

There appears to be a notable link between assets under management (AUM) and performance. Excluding the JP market, the VanEck Semiconductor ETF (SMH US) stands out with the highest AUM and the most impressive annualized return since its launch.

Return analysis also shows SPDR S&P Semi ETF (XSD US) was the worst performing semi ETF. The ETF tracks an equal-weighted index of semiconductor stocks, and tilts its portfolio away from large, well-known companies and toward smaller ones.

■ The semis industry will continue to benefit from growing demand

The semiconductor sector's current PE of 22x, surpassing the five-year average of 18x, may present a challenge for widespread revaluation within the industry, with investors highly selective across end markets. Despite this, the year 2024 is anticipated to be a period of strong fundamental growth.

According to Gartner, semiconductor sales are expected to increase from US$527 billion in 2023 to US$1,141 billion in 2032. Among them, logic chips are still the main growth driver.

Parallel-process computing, high-bandwidth memory and high-speed data transmission could be required for AI computing, boosting demand for AI application-specific integrated circuits (ASICs), graphic processing units (GPUs) and high-speed network chips. Demand for compound semiconductors for electric vehicles and next-generation memory chips could also rise.

■ What advanced technologies are worth looking forward to？

ASML's next-generation 3800E EUV lithography machine might be deployed in 2023, supporting plans by Intel, TSMC and Samsung to start producing 2nm chips in 2025. The system's bigger and improved mirrors enhance chip-manufacturing yield.

There is also potential for strong growth in demand for production tools that make advanced package substrates, including lithography tools, laser drills, dicers, bonders and testers. Besides, demand for chip-on-wafer-on-substrate (CoWoS), an advanced package solution developed by TSMC, is also likely to increase due to the spread of ChatGPT and other generative AI applications.

Source: TSMC

In general, the advancement of artificial intelligence and the progress of technology are set to benefit every segment of the semiconductor industry, providing a solid foundation for the continued growth and relevance of semiconductor ETFs.