Semiconductor Chip ETFs a Must-Have Component of Every Private Portfolio

Intel Corp. (INTC) said on Monday it’s approaching a $6 billion deal to buy Tower Semiconductor (TSE), sending the latter’s U.S.-traded shares of the Israeli microchip maker soaring in the after hours trading.

The company, which makes a wide variety of chips ranging from designed for the consumer, industrial, automotive and mobile markets, has manufacturing facilities in Migdal Haemek, Israel; as well as Agrate, Italy, Newport Beach, California; and San Antonio, Texas.

Tower also owns a 51% stake in TPSCo. with Nuvoton Technology Corp. TW:4919 having a 49% stake. That partnership has three facilities in Japan specializing in integrated circuits, more than 750 million of which are designated for the troubled auto industry.

Intel has pledged to build out its manufacturing capacity, earmarking up to $28 billion for 2022 back in October, and recently said it will spend more than $20 billion to build a “mega-site” fab in Ohio, as well as $20 billion for sites in Arizona. The move to build capacity has met with concern from analysts because Intel’s spending is punishing the company’s gross margins.

Semiconductor microchips act as the brains to numerous ubiquitous devices, including smartphones, calculators, computers, and much more. As technology continues to improve and expand, these chips will invariably be in demand to help power new devices. Since there will be a protracted shortage of microchips due to well-known supply bottlenecks, and in response to that recently Europe even decided to build its own factories, one has more and more reasons to expect outstanding prospects for the industry as a whole. Rising likelihood of heated M&A season going forward, without knowing concrete names, is best served with a little help of the industry dedicated ETFs. Among them the best known are Invesco Dynamic Semiconductors ETF (PSI), VanEck Vectors Semiconductor ETF (SMH) and iShares PHLX SOX Semiconductor Sector Index ETF (SOXX). These semiconductors ETFs invest in stocks of companies engaged in the manufacturing of semiconductors. These can include both semiconductor makers themselves, as well as the companies that provide goods and services to semiconductor manufacturers.

SOXX tracks a popular benchmark of companies that produce semiconductors. The fund focuses on U.S. stocks, but it also invests about a quarter of its assets in international public companies, giving it relatively balanced exposure from a geographic perspective. Investors should note that this fund dedicates the majority of its assets to medium and large cap funds, meaning that it will be more volatile than a traditional large cap fund, but it also presents strong growth opportunities for those who believe in the semiconductor segment as a whole. Considering the focus of the fund, a decent level of diversification is present in this product as it holds close to 125 securities in total.