During the 2023 Lunar New Year holiday, while Taiwan's stock market was closed and everyone was enjoying the festive atmosphere, TSMC's ADR quietly surged 16% overseas, pushing the ADR premium to nearly 30%. This led to an 8% increase in TSMC's stock price on the first trading day after the holiday, driving Taiwan's stock market to new highs.

TSMC is crucial not only to Taiwan but also to the global semiconductor industry, but what exactly is TSMC's role in semiconductor industry, and how does the semiconductor supply chain work? You will find the answers for the above questions after reading the following article.

What is a Semiconductor

A semiconductor is a material with unique physical properties. Since it is not 100% conductive, it is called “semiconductor”. By doping different elements, the conductivity of a semiconductor can be controlled, and factors such as temperature and external voltage can influence its behavior. Due to its controllable conductivity, semiconductors are widely used in everyday electronics, particularly in devices as switches and amplifiers. This makes semiconductor components integral to building and processing electronic circuits used in a wide range of electronic technologies.

Semiconductor Materials

Elemental Semiconductors

The most common material for elemental semiconductors is silicon. While there are many elements that can serve as the base for semiconductors, silicon is widely used due to its abundance and cost-effective extraction (e.g., from sand and soil), making it a mainstream material in commercial applications.

Compound Semiconductors

Compound semiconductors are made from multiple elements and exhibit different properties depending on their composition. For example, gallium arsenide (GaAs) is known for its high-frequency characteristics and fast electron mobility compared to silicon, making it suitable for applications such as electronic communications; Gallium nitride (GaN) is widely used in power supply applications; Silicon carbide (Sic) has become popular recently due to its stability under high temperatures.

Semiconductor Supply Chain

The semiconductor supply chain can be divided into three parts: upstream (design), midstream (manufacturing), and downstream (packaging and testing). Next, we'll provide a detailed look at the supply chain and highlight some key Taiwanese companies in each segment.

Semiconductor Supply Chain: Upstream

IC / IP Design

The upstream semiconductor industry can be broadly divided into two main areas: IC design and IP (Semiconductor intellectual property core).

• IC design can be seen as the blueprint of a chip, determining its functions, the placement of components, and their connections. After the design is completed, downstream manufacturers take over the production and packaging. IC design dictates the chip's performance, power efficiency, and stability. Common types of IC designs include power management ICs, memory ICs, and logic ICs. Key Taiwanese companies in this segment include Delta Electronics (2308), MediaTek (2454), Winbond (2344), and Silergy (6415).
• IP (Semiconductor intellectual property core) refers to the intellectual property used in IC design. This involves reusable design methods that can be modularly applied in chip design to accelerate development. Therefore, for companies purchasing these design modules will be able to use them directly, saving them lots of time. Key Taiwanese IP companies include Alchip (3661), Faraday (3035), and M31 (6643).

Semiconductor Supply Chain: Midstream

The midstream mainly includes IC and wafer manufacturing, as well as mask, diode, and DRAM production. Here, we'll focus on IC and wafer manufacturing.

IC and wafer manufacturing refers to the process of turning the IC design into physical chips. It begins by slicing wafers from silicon ingots, then using lithography, masks, and other techniques to imprint the design onto the wafers. The process involves etching, and the final step is cutting the wafer into individual chips. Taiwan's TSMC occupies a key position in this midstream segment, responsible for wafer/IC manufacturing, mask making, etching, and wafer testing. TSMC's high yield and successful mass production of 3nm technology have made it a leader in global semiconductor manufacturing. Furthermore, it is set to launch even more advanced 2nm technology soon. Other key IC manufacturers include UMC (2303) and Episil (3707), and silicon ingot producers include GlobalWafers (6488), Wafer Works (6182), and EPI (3016).

Semiconductor Supply Chain: Downstream

Once the IC and wafer manufacturing is complete, the next step is packaging and testing. The downstream segment of the semiconductor industry includes packaging, testing, and components such as lead frames, substrates, and distribution.

Packaging and testing involve encapsulating the chip and testing it to ensure stability and performance. The process involves placing the chip on a printed circuit board (PCB), encapsulating it in a non-conductive material like plastic or ceramic, and then connecting it to external components via wires or soldering. Testing includes electrical, functional, temperature, and lifespan tests to ensure quality. Major Taiwanese players in this segment include ASE Technology (3711), Powertech (6239), and KYEC (2449).

Quick Overview

After the above introduction, we hope you have a better understanding of the semiconductor industry. The next part, we'll look at several Taiwan-based semiconductor ETFs!

Introduction to Semiconductor ETFs

After exploring the vast semiconductor supply chain, it's clear that, aside from TSMC, companies like MediaTek and ASE Technology also play important roles in the global supply chain. As investors, besides investing in individual stocks, we can also use ETFs to invest in a basket of semiconductor-related stocks.

Below we will introduce four Taiwanese semiconductor ETFs. We will compare their stock selection criteria, dividend policies, and performance, making it easier for investors interested in semiconductors to choose the right option.

CTBC Taiwan ESG Leading Semiconductor ETF (00891.TW)

00891 is the largest and earliest semiconductor ETF among the four. Its stock selection criteria cover market capitalization, liquidity, and financial indicators, and it's currently the only ETF incorporating ESG (Environmental, Social, and Governance) standards. The ETF includes 30 companies, with MediaTek (2454) and TSMC (2330) accounting for about 20% of the total weight. Since its launch three years ago, 00891 has paid quarterly dividends, with an average yield of 4.48%. Over the past six months, it has delivered a return of 33.82%, and its most recent quarterly dividend was NT$0.32, an annual yield of 7.54%.

Fubon Taiwan Core Semi ETF (00892.TW)

00892 divides the semiconductor industry into "semiconductor manufacturing" and "non-semiconductor manufacturing," selecting 15 companies from each category to form the ETF. The allocation mechanism caps the maximum weight of the largest component stock at 25%, with TSMC (2330) taking up the maximum one-quarter weight. Therefore, investors in 00892 are heavily exposed to TSMC. 00892 follows a biannual dividend policy (July and November), with an average yield of 4.07% since its inception. Its six-month return stands at 27.92%. Investors should monitor both the overall semiconductor industry and TSMC's performance.

Shin Kong TIP Taiwan Semiconductor 30 ETF (00904.TW)

Compared to the other ETFs with various selection criteria, 00904's approach is straightforward: it selects the top 30 companies in the semiconductor industry based on market capitalization. This means 00904’s holdings consist of the largest companies in Taiwan's semiconductor upstream, midstream, and downstream segments, making it a simple choice for investors looking to invest in the industry's major players. Launched in 2022, 00904 pays quarterly dividends, with an average yield of 2.75%. Its six-month return is 32.53%, and its first-quarter dividend for this year was NT$0.35, resulting in an impressive annualized yield of 9.00%, the highest among the four ETFs.

Capital TIP Cstm TW Semiconductor Div Yield ETF (00927.TW)

As the ETF name suggests, 00927 focuses on yield, selecting 30 companies from the semiconductor industry based on liquidity and profitability. The ETF limits the weight of the top five holdings to 15%, resulting in a more balanced allocation, which makes its stock price less vulnerable to fluctuations in any single company. Launched last year, 00927 follows a quarterly dividend policy, with a yield of 2.8% from its two distributions in 2023. Its six-month return is 24.59%, and its first-quarter dividend for this year was NT$0.36, resulting in an annualized yield of 8.32%.

Summary: Comparison of the Four ETFs

Finally, here's a summary table comparing the four semiconductor ETFs:

• Although these four ETFs track different indices and follow different stock selection strategies, their top five holdings largely overlap, featuring Taiwan’s largest semiconductor companies, with the main difference being weight distribution.
• As inventory adjustments come to an end and AI continues to drive growth, the semiconductor market has become one of the main focuses, reflected in the strong returns and yields of these four semiconductor-themed ETFs over the past year.
• All four ETFs charge the same management fee, so investors can choose based on the selection mechanisms and weight distribution they prefer.

If you are interested in AI industry, you can also refer to the following articles!

Taiwan Industry 101: Introduction to CoWoS Technology

Taiwan Industry 101: The Silicon Photonic

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