After our recent webinar introducing our ETFS Semiconductor ETF (ASX Code: SEMI), we received many questions from investors around the fund, and below are the answers to these burning questions.
Are Chinese companies included or excluded?
Chinese companies are excluded from the SEMI ETF. At this stage, Chinese semiconductor technology lags developed markets, Korea, and Taiwan by many years. The Chinese government is aware of this and has begun subsidising its local semiconductor industry. There has been some suggestion that Taiwanese companies may be acquired by Chinese companies to speed up their technology growth.
At this point of the cycle, is it better to be in chip manufacturing equipment (eg ASML, Lam Res) than chip manufacturing? What is the likelihood of the nanochip becoming a significant disruptor of the traditional semiconductor industry?
We believe it is best to be diversified across both fabless and foundries. In this way, investors can be spared the time, work and risk involved in researching semiconductor cycles and trading between them. We do not believe that semiconductors are susceptible to the same type of disruption as other sectors such as software. Bill Gates once said that two guys working in their garage was all it took to disrupt Microsoft. This is because coding computer programmes is not capital intensive; anyone can do it. Semiconductors, by contrast, are much more like the aircraft industry--think Boeing and Airbus. Semiconductors - like aircrafts - are extremely capital intensive and dominated by national champion companies (TSMC in Taiwan, ASML in the Netherlands) that receive extensive government subsidies. Two coders working in their garage may threaten Microsoft, but no matter how good an entrepreneur you are, you're never going to build an A380 or a 737 in your garage. Nor are you going to build an extreme ultraviolet lithography machine or a semiconductor foundry in your backyard.
Growth of AUM of SEMI since launch?
As of 28 September 2021, our SEMI ETF held $35 million in AUM. This is up from $2 million on the inception date (27 August 2021).
How can investors purchase SEMI?
Investors can purchase ETFs on any trading day through their brokerage account. CommSec, NABtrade and Superhero are examples of brokers.
Is there much crossover between SEMI, and TECH, ROBO & ACDC?
As of 20 September 2021, there is a moderate amount of overlap between TECH and SEMI. Of TECH's 34 holdings, 9 of them are currently in SEMI, representing 23.3% of TECH's portfolio. There is a small degree of overlap between ROBO and SEMI. Of ROBO's 84 holdings, 4 of them are currently in SEMI, representing 4.7% of ROBO's portfolio. There is presently zero overlap between ACDC and SEMI. Please note that these figures may vary after index rebalancing, at which point semiconductor companies can enter or exit from TECH or ROBO. We believe it is highly unlikely that much overlap will ever exist between ACDC and SEMI.
What is the impact of geopolitical events on the ETF? (i.e. China/Taiwan)
SEMI focuses on companies from developed markets, Korea and Taiwan, so Chinese stocks are excluded. This should work to minimise China-related risk. It's hard to know how geopolitical tensions between Taiwan and China will play out. However, China has indicated a desire to work with Taiwanese semiconductor companies, in an effort to build its own semiconductor industry.
Is Altium included in the ETF?
As of 21 September 2021, Altium is excluded from the portfolio. SEMI only holds the 30 largest semiconductor companies in the world. ETF Securities believes that semiconductors are a capital intensive and research and development intensive industry where the largest companies tend to dominate. The smallest company in SEMI's portfolio at the time of writing is Qorvo, which has a market capitalisation of US$18.9 billion. Altium by contrast has a market capitalisation of A$4.7 billion, making it significantly smaller than Qorvo.
Can you explain more on the ETFs weighting methodology? Why does it adopt a market cap weighted approach and also include a stock cap of 10%?
SEMI is market capitalisation weighted. However, there is a 10% cap on the largest holdings. The 10% cap is placed to stop the largest names - like TSMC, ASML and Nvidia - becoming too influential in determining the performance of the fund. At rebalance, we sell down any stock whose share price movements (or currency movements) have caused them to take more than 10% of the fund. However in between rebalances some companies can and do exceed the 10% threshold. For example, on 20 September 2021, ASML took 11.64% of the fund, and therefore exceeded the 10% cap. This owed to ASML's share price increasing in value from the fund's inception date (27 August) to the close of trading on 20 September 2021 Sydney time. Rebalances occur quarterly because we wish to ensure companies stay below the 10% cap. Distributions occur semi-annually. Semiconductor companies have historically paid lower dividends than other sectors.
What are some of the key risks for this ETF?
SEMI only holds shares. It holds no bonds and minimal cash. This means a key risk will be equity market volatility. And as SEMI holds a concentrated 30 stock portfolio, it will likely be more volatile than the broader share market as measured for instance by the MSCI World. Key sector-specific risks for semiconductors include demand slowing down. For example, if interest in cloud computing, electric cars, video gaming, cryptocurrency mining or other electronics-intensive sectors slow down then demand for semiconductors could fall. Another risk is geopolitics. Geopolitical tensions between the US and China appear to have cooled slightly this year. However, they could flare up again and challenge semiconductors.
As a mature industry, will valuations continue to grind up?
SEMI is a mature industry, but it has experienced strong growth in recent years. In this respect it may resemble biotech, which is also a mature industry but has grown strongly in recent years, enjoys large government support and has improved its technology.
What is the competition in Australia for the SEMI ETF? Is it unique?
In terms of competitors, SEMI is the first pure-play semiconductor ETF in Australia and as such has no direct competitors on Australian exchanges. The thematic products from other issuers have very limited semiconductor exposure or none. We would also note that SEMI offers a more lower expense ratio than other companies’ thematic ETFs. Funnily enough, the closest ETF to SEMI would in fact be our own technology sector ETF, the ETFS Morningstar Global Technology ETF (ASX Code: TECH). As of September 2021, nine of SEMI’s stocks were present in TECH.
What concerns do you have of some of the FAANG stocks like Apple becoming more involved in the semiconductor industry?
There is a distinction between companies that design chips and those that manufacture them. Apple and Amazon have designed some of their own chips for some of their products. However, they don't manufacture the chips. Making microchips is a highly specialised activity dominated by TSMC. The chips that