Top ETFs to Watch Amid Positive Semiconductor Cycle Trends

A-shares showed resilience against the strong advances of external markets, with the semiconductor sector significantly rising again after a period of fluctuation and correction. On a single day, the electronic industry under the Shenwan first-level industry saw a 3.45% increase, and the semiconductor industry under the second-level industry rose by 3.82%, ranking 5th among 124 second-level industries.

Looking back at the recent performance of the semiconductor industry, data from Wind shows that as of July 19, 2024, the electronic industry under the Shenwan first-level industry ranked first in the increase over the past 60 days, with a range increase of 13.40%, significantly higher than the second and third places of public utilities and banks, which are characterized by mid-to-low valuation and high dividend concepts. When examining the Shenwan second-level industry in detail, the components, consumer electronics, and semiconductors have seen the top three increases over the past 60 days, with increases of 27.18%, 16.84%, and 16.29%, respectively.

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In the week following July 22, A-shares generally corrected, with the electronic industry leading the decline from July 22 to 26, with a single-week drop of 5.29%.

At the same time, the U.S. semiconductor market experienced significant fluctuations and corrections. The Philadelphia Semiconductor Index climbed to 5,900 points and then continued to fall, breaking below 4,900 points. On July 30 alone, it fell by as much as 3.88%. However, after a significant correction over half a month, the Philadelphia Semiconductor Index attacked again on July 31, surging nearly 7% and regaining the 5,200-point mark in one go.

News indicates that the rapid rebound in technology semiconductors is related to the better-than-expected second-quarter performance of AI chip giant AMD and Samsung Electronics, while Morgan Stanley maintained its overweight rating on Nvidia. Although institutions have pointed out potential risks, they remain optimistic about the future prospects.

It should be noted that even though the Philadelphia Semiconductor Index has corrected significantly in the short term, it has still increased by more than 100% since the beginning of 2023. In the same period, the Shenwan second-level industry semiconductor in A-shares has fallen by 13.55%.

Securities firms believe that the main reason for the difference in trends between U.S. stocks and A-shares is the influence of the explosive growth of generative AI, which has benefited the industry chain first. Therefore, the investment value of the A-share semiconductor industry is also a key focus for most investors.

Looking back at 2024, taking the Shenwan second-level industry semiconductor index as an example, there have been several noticeable fluctuations since February, and the trend has basically been震荡上行 over the past three months. However, it still has a gap compared to the beginning of the year, and there is still a great deal of room for growth compared to the 2021 high.

In terms of valuation levels, the A-share semiconductor industry is undoubtedly in a relatively attractive position. As of July 31, the latest TTM price-to-earnings ratio of the semiconductor industry is 75.19 times, lower than the median of the past decade at the 47.75th percentile; the price-to-book ratio is 3.62 times, at the 19.31st percentile of the past decade.Facing such market conditions, investors cannot help but wonder if a new upcycle for technology stocks is on the horizon. What preparations should be made before the market arrives?

A multifaceted analysis of semiconductor trends suggests that a cyclical upturn has become a consensus?

Looking at the mid-term strategies of various securities firms for the electronics and semiconductor industries, optimists are in the majority. The analysis of technology stock trends requires a step-by-step examination of factors such as cyclical perspectives, industry expectations, policy directions, and geopolitical issues.

Firstly, from a cyclical perspective, the fluctuations in semiconductor product cycles are closely related to downstream demand, influenced more by new products and macro-level factors. Generally, product cycles last around 5-10 years and exhibit a "W" shape.

The chart of global semiconductor sales below indicates that we are currently in the initial stage of a new semiconductor cycle, that is, the starting form of the "W" shape.

Breaking down the data further, from January to May 2024, global semiconductor sales grew year-on-year by 15.2%, 16.3%, 15.2%, 15.8%, and 19.3% respectively; Chinese semiconductor sales grew year-on-year by 26.6%, 28.8%, 27.4%, 23.4%, and 24.2% respectively.

Supply and demand imbalances lead to the cyclical nature of the semiconductor industry. Factors such as a surge in consumer electronics sales in 2020 and an increase in the penetration rate of new energy vehicles led to a global shortage of semiconductors; in 2021, semiconductor manufacturers increased production capacity, leading to an oversupply and downward pressure on prices; starting from the second quarter of 2022, consumer electronics demand entered a period of weakness due to overdrawing, and the crisis of high inventory exacerbated the industry's downturn. After nearly a year and a half of adjustment, inventories have gradually been reduced.

Many domestic securities firms believe that AI, as an important driving force for the growth of the semiconductor industry, will drive the gradual recovery of downstream demand, benefiting many sectors such as memory, analog, and packaging and testing. At the same time, there are clear signs of improvement in demand for consumer electronics, industry, and automotive sectors, and the semiconductor industry has essentially completed its bottoming out.

According to the latest forecast by the World Semiconductor Trade Statistics Organization (WSTS), the year-on-year growth forecast for global semiconductor market sales in 2024 has been revised up from 13.1% to 16%, estimating that the global semiconductor market will reach $611.2 billion in 2024, and it is expected to grow by 12.5% in 2025, reaching $687.4 billion.

With the reduction of industry inventory and the recovery of downstream demand, the semiconductor industry has shown a clear recovery in the first quarter. Taking the Shenwan secondary industry semiconductor as an example, Wind data shows that in the first quarter of 2024, its constituent stocks achieved a main business income of 110.323 billion yuan, with a net profit of 5.117 billion yuan, compared to the same period last year's main business income and net profit of only 61.174 billion yuan and 2.969 billion yuan respectively.Companies with higher weights in the constituent stocks, such as North Microelectronics, Will Semiconductor, GigaDevice, and Montage Technology, have all released their semi-annual performance forecasts for 2024. Among them, North Microelectronics' attributable net profit is expected to grow by 42.8%-64.5% year-on-year; Will Semiconductor's attributable net profit is expected to grow by 754%-819% year-on-year; GigaDevice's attributable net profit is expected to grow by 54.18%; Montage Technology's attributable net profit is expected to grow by 613%-662% year-on-year. (The above is not an individual stock recommendation)

Against the backdrop of the development of new quality productive forces becoming an important guide for the direction of the domestic economy, "Sci-Tech Valuation" is expected to emerge in the medium and long term. The relevant industrial directions of new quality productive forces include new generation information technology, new energy, new materials, high-end equipment, new energy vehicles, brain-computer interfaces, quantum information, humanoid robots, generative artificial intelligence, bio-manufacturing, future display, and future networks.

From the aforementioned development directions, it can be seen that the electronics industry will be the top priority of new quality productive forces, and semiconductors, as an important direction of cutting-edge technology, have strong growth potential.

Under the backdrop of high policy attention to the development of the technology industry, the third phase of the National Big Fund has been established and entered the market, with a scale exceeding the total of the first and second phases. With the guidance of later policies, it is expected to improve the overall ecosystem of the industrial chain. The first two big funds introduced successively since 2014 have achieved good market effects. Taking the second phase of the big fund as an example, two years after entering, the Shanghai and Shenzhen 300 Semiconductor Index rose by 152.45%, far exceeding the 28.63% increase of the Shanghai and Shenzhen 300 during the same period, with an excess return of 123.82%.

Against the backdrop of the accelerated global digital revolution, national policies support and guide the semiconductor industry, helping to achieve technological breakthroughs, and there is a huge space for the domestic substitution of the semiconductor and other technology industry chains.

Semiconductor-related indices each have their strengths. How to layout through ETFs?

As the semiconductor industry gradually enters the prosperity cycle has become the consensus of most institutions, how to layout has become the focus of investors.

Unlike the fields of consumption and dividends, technology involves many sub-industries. Taking semiconductors as an example, if you choose individual stock targets for investment, it is easy to fall into cognitive misunderstandings due to a lack of professional knowledge.

Then, ETFs with high liquidity and strong flexibility will become the first choice. At the same time, the flexibility of ETF intraday trading can also allow investors to avoid short-term volatility risks as much as possible.

According to statistics from the Federal Securities, there are currently 8 indices related to semiconductors in the market that are pegged to ETFs. These include the China Securities Chip Industry Index, the National Securities Semiconductor Chip Index, the Shanghai Science and Technology Innovation Board Chip Index, the China Securities Semiconductor Industry Index, the China Securities Full Index Integrated Circuit Index, the China Securities Semiconductor Materials Equipment Theme Index, and the China Securities Full Index Semiconductor Products and Equipment Index.Shanghai Stock Exchange STAR Market Chip Index

Focused on Chips, Leading Net Inflows: Harvest STAR Market Chip ETF (588200)

Wind data indicates that in the nearly three months up to July 31st, the STAR Market Chip ETF (588200) recorded net inflows of nearly 2 billion yuan. Although not as active as broad market indices, it stands out among many thematic index ETFs, with its scale once approaching 7.5 billion yuan, and its shares continuously setting new highs since listing. Looking back at its inception, the STAR Market Chip ETF had a scale of less than 300 million yuan, showing significant growth.

The STAR Market Chip ETF tracks the Shanghai Stock Exchange STAR Market Chip Index, which was released in June 2022 and officially listed in September 2022, coinciding with the AI market trend of 2023. During the first round of the AI market trend, the STAR Market Chip Index rose by more than 50 points, demonstrating high elasticity.

In the previous round of fluctuating upward movement, the STAR Market Chip Index recorded an approximate increase of 15% in the past six months, showing a more noticeable rebound among the aforementioned eight semiconductor-related indices, while the Shanghai-Shenzhen 300 Index had a negative return for the same period.

This is somewhat related to the STAR Market Chip Index's direct focus on the chip theme. The index selects securities related to semiconductor materials and equipment, chip design, chip manufacturing, chip packaging, and testing from companies listed on the STAR Market as index samples, with 94% of its constituent stocks' weight concentrated in the semiconductor industry.

Compared to other semiconductor-related indices, the STAR Market Chip Index focuses on the STAR Market and anchors to chips, with a higher attribute of technological innovation.

Even during the downturn of the semiconductor industry, the STAR Market Chip ETF still achieved relatively good performance in various phased thematic market trends. For example, in 2023, it recorded a 7% return for the year, ranking in the top 10% of its peers; and in less than two years since its establishment, it has recorded a return ranking in the top 25% of its peers.

Looking at the second-quarter report of 2024, Cambricon-U, a heavy-weight holding of the STAR Market Chip ETF, recorded an increase of 78.81% in the second quarter, while澜起科技 and Huahai Qingke recorded increases of over 30% during the same period, with SMIC, Amlogic, and CMC Microsystems also showing significant gains.

Fund manager Tian Guangyuan once stated that the market maintains a high level of attention for enterprises characterized by high technology, high efficiency, and high quality, which reflects the emphasis on hard-core technology, especially chip technology. As the cornerstone of artificial intelligence, the performance of chips directly affects the efficiency of AI algorithms.It is widely acknowledged that in the future, with the continuous advancement and broadening application scope of artificial intelligence technology, from cloud computing and data centers to edge computing, the Internet of Things, and specific field applications such as autonomous driving vehicles and high-performance computing, there will be a sustained high demand for AI chips that are high-performance, low-power, and high-computational. Therefore, the investment potential of chips in the future remains enormous, especially for companies that can continuously innovate technologically, maintain a leading position in the market, and adapt quickly to industry changes. However, when investing, attention should also be paid to the risks brought about by industry cyclical fluctuations, changes in the international trade environment, and the replacement of technology.

Overall, the AI chip sector is optimistic in the long term, but careful analysis and selective investment targets are necessary.

China Securities Chip Index

The largest scale, waiting for a rebound: Huaxia China Securities Chip ETF (159995)

Unlike the STAR Chip Index, the China Securities Chip Index and the China Chip Industry Index have constituent stocks distributed across the main board, STAR board, and ChiNext board.

At present, the China Securities Chip Index has the strongest representativeness. This index excludes securities with the bottom 20% transaction volume among chip industry listed companies and selects the top 30 securities by total market value as the index samples. This also means that it covers the 30 largest semiconductor companies in the A-share market, which is very similar to the Philadelphia Semiconductor Index.

Looking at the market value distribution, the China Chip Index covers large, medium, and small caps, with a larger weight for large and medium caps. Among them, there are a total of 5 targets with a total market value exceeding 100 billion yuan, and a total of 6 targets with a total market value between 50 billion and 100 billion yuan. The remaining 19 targets all have a total market value exceeding 20 billion yuan.

Compared with the China Chip Industry Index, which has 50 constituent stocks, the China Securities Chip Index has a higher focus on industry leaders due to the smaller number of constituent stocks. Since it covers the leaders of the semiconductor industry, the constituent stocks of the above two indexes have a high degree of overlap.

At present, the top ten weighted stocks are North Hua Chuang, SMIC, Wei Er Shares, Hai Guang Information, Zhong Wei Company, Zhejiang Innovation, Lanqi Technology, Jiangsu Changdian Technology, Cambricon-U, and San'an Optoelectronics.

The Chip ETF (159995) that tracks the China Securities Chip Index, as the largest technology-themed ETF product in the entire market, has always been a focus of attention.The latest scale of the chip ETF is 21.849 billion yuan, showing an initial trend of bottoming out and rebounding, with an average daily transaction volume of over 500 million yuan, indicating excellent liquidity.

Fund manager Zhao Zongting stated that in the second quarter, geopolitical conflicts and other risk factors still exist, the global inflation rate is falling slower than expected, and the economy continues to show an overall upward trend. The scale of equipment manufacturing and high-tech manufacturing industries is growing rapidly. International organizations and institutions have successively raised their expectations for China's economic growth, fully demonstrating the international community's confidence in China's economic growth prospects.

The China Securities Index (CSI) Semiconductor Products and Equipment Index

The broadest coverage and the longest establishment time: Guolian An CSI Semiconductor ETF (512480)

The CSI Semiconductor Products and Equipment Index was published in July 2013 and is currently the longest-established, largest total market value, and most constituent stock semiconductor-related index in China.

Data shows that the CSI Semiconductor Products and Equipment Index selects semiconductor product and equipment industry stocks from the CSI sample stocks to reflect the overall performance of stocks in this industry. Currently, the index has as many as 109 constituent stocks, far more than the other seven semiconductor-related indices.

Looking at the industry distribution of constituent stocks, the semiconductor industry accounts for 92.6% in the Shenwan second-level industry, and also involves electronic chemical II, military electronic II, software development, computer equipment, and communication equipment.

Due to the large number of constituent stocks, the CSI Semiconductor Products and Equipment Index covers not only large and medium-sized stocks but also more small-cap stocks in the semiconductor industry. Among them, there are 41 constituent stocks with a total market value of less than 10 billion yuan, and 31 constituent stocks with a total market value of 10 billion to 20 billion yuan. This means that the proportion of constituent stocks with a market value of less than 20 billion yuan accounts for 66%.

Although small-cap stocks have good growth potential and greater imagination space, they are more likely to be speculated and will face volatility and liquidity risks.

Like the aforementioned two ETFs, the Semiconductor ETF (512480) tracking the CSI Semiconductor Products and Equipment Index also achieved good performance in the past six months.Fund manager Huang Xin once stated that semiconductor chips are considered strategic materials for the new era, as almost all high-end technology products cannot be separated from them, and the development prospects are very broad. Fund manager Zhang Shengyuan believes that the integration of AI cloud terminals has strengthened the wave of consumer electronics renewal, and semiconductors will be a long-term focus.