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Pay enough attention to the technology sector this year and advisors are sure to hear about the global semiconductor shortage.
The chip supply shortfall exposes weak links in the global supply and for the made in the U.S.A. crowd, the crimped supplies highlight vulnerabilities in relying on foreign production of essential components. Even with all that, the market is far from pricing in a demise of semiconductor equities. The iShares PHLX Semiconductor ETF (NASDAQ:SOXX) is higher by 13.33% year-to-date, beating the S&P 500 by almost 100 basis points.
Clearly, that performance confirms markets aren't deterred by chip makers' inability to adequately supply end users. As vexing as that scenario is, it's encouraging to the extent that it shows investors are keeping their eyes on the long-term ball when it comes semiconductors' status as the bedrock of technological advancements.
“Although the semiconductor shortage creates headwinds for various industries in the short-term, it is important not to lose sight of the long-term trends in motion,” according to Global X research. “In many ways, chips are the new bricks, with a wide range of industries and products depending on semiconductors to provide innovative new features and take advantage of the latest technologies.”
U.S. Role in Chip Equation
Some clients may already know this, but the role of the U.S. in the global chip market is significantly split. When it comes to spending on semiconductor research and development and overall design, the U.S. is far and away the global leader.
“America is the global leader in the field of chip design, with American companies accounting for 47% of global semiconductor sales in 2019,” notes Global X. “America’s ability to draw in talented engineers from abroad and its R&D spending as a percent of sales in the semiconductor industry, which leads the world at 16.4%, are both crucial drivers of innovation that allow it to maintain a competitive edge.”
Courtesy: Global X
Conversely, nearly all of the world's chip manufacturing occurs in East Asia, namely South Korea and Taiwan. Dependence on foreign manufacturing highlights vulnerabilities that can arise from global shocks, such as the pandemic, and underscores why some countries are attempting to domesticate chip production.
That's easier said than done. Semiconductor foundries are expensive and simply because a country can bring some production “in house,” that doesn't mean it has design capabilities to make it work. Additionally, a “cheap” semiconductor fab facility can cost more than $1.5 billion to build and take up to three and a half years to ramp up. For clients wondering why the U.S. doesn't produce more semiconductors here, there's the answer.
Don't Fret Because...
Despite the aforementioned bullishness displayed by semiconductor stocks this year, the global chip shortage may sound like an alarming scenario to many clients – one exacerbated by the fact that there's little chance the U.S. onshoring will be chip output in bulk anytime soon.
However, advisors shouldn't let clients throw in the towel on semiconductor equities because disruptive growth technologies, many of which are still in their early innings, support the long-term chip investing thesis.
“Many of the disruptive technologies currently moving up the S-Curve in adoption rely on semiconductors,” notes Global X. “Whether it’s electric and autonomous vehicles, artificial intelligence, industrial robots, or IoT devices, few disruptive technologies don’t rely on semiconductors in one way or another.”
Bottom line: Advisors can assist clients seeking tactical exposure navigate a tricky semiconductor environment by helping them keep their eyes on the long-term ball when it chips. Fortunately, disruptive growth says that outlook is bright.
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