Semiconductor ETFs to keep an eye on as Congress passes CHIPS Act

What are semiconductors and what are they for?

Semiconductors, sometimes colloquially referred to as chips or integrated circuits, are materials that manage and control the flow of current. They are foundational in anything computerized. While we do not need to understand all the intricacies of how semiconductors work, know this: if you have used a smartphone or a laptop in the past week, or used your vehicle to commute to work, then you can thank semiconductors for that. And the list does not end there, other applications for semiconductors include Banking ATMs, video game consoles, refrigerators, and thousands of other electronic devices we utilize every day. 

Global semiconductor shortage

While demand for chips in recent years has generally exceeded the available supply, the COVID-19 pandemic amplified the problem to a greater magnitude. The increase in online remote work meant greater reliance on computers and networks. Additionally, labor shortages and supply chain disruptions exacerbated the problem as ports and shipping lines were shut down due to restrictions and lockdowns. This resulted in manufacturers being unable to meet consumer demand, causing major production backlogs and inventory issues. 

Congress passes CHIPS Act

In a bid to counter the scarcity of chips, the House of Representatives and the Senate passed the CHIPS Act with support from both Democrat and Republican lawmakers. The bipartisan bill, aims to subsidize American companies that produce semiconductor chips with $52 billion in funding. Additionally, the bill will provide another $170 billion over a five-year span in funding to boost research and development for the industry as a crutch for American companies to compete on a global scale. The hope is the CHIPS Act will increase competition for the industry, while making the United States less reliant on other nations for supply, especially in the wake of geopolitical tensions between Taiwan and China that could potentially disrupt supply chains in the future. 

3 semiconductor ETFs to watch

In the wake of congress's new plan to boost up domestic chip production, the following ETFs could be of interest to investors seeking to benefit from the new round of funding the industry is set to receive, with the diversification benefits and relatively low MER fees of the ETF structure offering an attractive alternative to individual stock selection in today’s volatile market environment.

SOXX – (iShares Semiconductor ETF)

• AUM: $7,463.53 M 
• Expense Ratio: 0.40%
• YTD performance: -22.43%

SMH – (VanEck Semiconductor ETF)

• AUM: $7,217.43 M 
• Expense Ratio: 0.35%
• YTD performance: -21.36%

FTXL – (Defiance Next Gen H2 ETF)  

• AUM: $613.14 M 
• Expense Ratio: 0.56%
• YTD performance: -23.71%

Data as of August 15, 2022.