Semiconductor Investing: The Industry Powering the Modern Economy

Semiconductors — the integrated circuits that power everything from smartphones and data centres to cars and medical devices — have moved from a niche industrial sector to one of the most strategically important industries in the global economy. The artificial intelligence buildout of 2023–2026 has dramatically amplified demand for advanced chips, positioning semiconductors at the centre of both investment opportunity and geopolitical competition.

For investors, semiconductors offer exposure to powerful structural growth themes: AI infrastructure, electrification, automation, and connectivity. But the industry also carries specific risks — cyclical demand swings, enormous capital requirements, geopolitical supply chain disruption, and rapid technology obsolescence — that require careful consideration. This guide explains the structure of the semiconductor industry, the investment cycle, and how UK investors can access the sector.

Important: Semiconductor investing involves significant volatility and sector-specific risks. The value of investments can fall as well as rise. This guide is for information only and does not constitute financial advice.

The Semiconductor Supply Chain: Four Distinct Segments

Understanding where value is created — and where investment risk lies — requires distinguishing between the four main segments of the semiconductor supply chain.

1. Chip Design (Fabless)

Fabless semiconductor companies design chips but do not own manufacturing facilities. They outsource production to contract manufacturers (foundries). This asset-light model allows fabless companies to focus research and development spend on intellectual property rather than capital-intensive fabrication.

The most prominent fabless companies include:

• Nvidia: The dominant supplier of graphics processing units (GPUs) used for AI training and inference. Nvidia's CUDA software platform creates significant switching costs. As of 2026, Nvidia holds the majority of the market for high-performance AI chips used in data centres.
• AMD: A strong second in GPUs, particularly for AI inference, and a leading x86 CPU designer competing with Intel.
• Qualcomm: Dominant in mobile processors (Snapdragon chips in most Android smartphones) and connectivity chips (5G modems).
• Arm Holdings: Designs the processor architecture licensed by virtually every major chip company for mobile devices and increasingly for data centres; listed in New York since 2023.
• Broadcom: Networking chips and custom AI accelerators; also has significant software revenues.
• MediaTek: Taiwan-based; dominant in mid-range mobile chips, smart TVs, and IoT devices.
• Marvell: Data infrastructure chips; significant exposure to custom AI chip design for hyperscalers.

The fabless model's asset-lightness generates high margins and returns on capital — which is why leading fabless companies often trade at premium valuations.

2. Chip Manufacturing (Foundries)

Chip fabrication requires extraordinary capital expenditure — a state-of-the-art fab costs $10–20 billion to construct — and relentless technology investment. The complexity of manufacturing chips at leading-edge nodes (2nm, 3nm, 5nm) has concentrated the industry to a remarkable degree.

TSMC (Taiwan Semiconductor Manufacturing Company) manufactures the majority of the world's leading-edge chips. Its clients include Apple, Nvidia, AMD, Qualcomm, and hundreds of others. TSMC's dominance makes it a geopolitical flashpoint — Taiwan is the site of what strategists call the "silicon shield." TSMC is listed in Taiwan (as well as via ADRs in New York) but accessible to UK investors through ETFs and ADR-holding funds.

Samsung is the only other company currently manufacturing chips at leading-edge nodes, though it has faced yield challenges. Samsung also operates its own chip design division.

Intel is attempting to re-establish itself as a leading-edge foundry through its IDM 2.0 strategy, building new fabs in the US and Europe with significant government subsidies (US CHIPS Act, EU Chips Act). Intel's execution has been difficult — the company fell behind TSMC technically over the past decade and is working to catch up.

SMIC (Semiconductor Manufacturing International Corporation) is China's most advanced foundry, listed in Shanghai and Hong Kong. Due to US export controls, SMIC is restricted from accessing leading-edge equipment from ASML and other Western suppliers, limiting its technology to older nodes. SMIC represents China's domestic semiconductor manufacturing capability, which is the target of significant government investment.

3. Semiconductor Equipment

Manufacturing semiconductors at advanced nodes requires extraordinarily sophisticated equipment. This segment — often overlooked by generalist investors — has become one of the most strategically important and investable parts of the supply chain.

ASML (Netherlands, listed in Amsterdam and as ADRs in New York) holds a global monopoly on extreme ultraviolet (EUV) lithography machines — the equipment essential for manufacturing chips at 7nm and below. ASML is arguably one of the most strategically valuable companies in the world: without its machines, leading-edge chip manufacturing is not possible. The Dutch and US governments have used export controls on ASML equipment to restrict China's access to leading-edge chip manufacturing.

Applied Materials (US) and Lam Research (US) supply deposition and etch equipment; KLA Corporation (US) supplies process control and inspection equipment. Together, these US companies and ASML form a near-oligopoly in advanced semiconductor manufacturing equipment.

Tokyo Electron (Japan) and Shin-Etsu Chemical (Japan) are also major equipment and materials suppliers.

Equipment companies benefit from the capital intensity of the industry: every time a new fab is built or upgraded, they receive substantial orders. They also benefit from the aftermarket for service, spares, and upgrades.

4. Memory

Memory chips — DRAM (for working memory in computers and servers) and NAND flash (for storage in smartphones, SSDs, and enterprise storage) — form a distinct and notoriously cyclical segment.

Samsung, SK Hynix (South Korea), and Micron Technology (US) dominate DRAM production. NAND flash is produced by these three plus Kioxia (Japan) and Western Digital. Memory is a commodity — price is set by supply and demand, and both swing sharply as capacity additions lag or lead demand cycles. Memory company earnings are highly volatile, making the segment difficult to time.

HBM (High Bandwidth Memory), a premium memory product designed for AI accelerators, has become strategically important — SK Hynix and Samsung supply the high-bandwidth memory used in Nvidia's data-centre accelerators — HBM3 in the H100 and HBM3E in the later H200 and Blackwell chips.

The Semiconductor Cycle

One of the most important investment considerations in semiconductors is the industry's pronounced cyclicality. Demand from smartphone makers, PC manufacturers, automotive OEMs, and hyperscalers tends to cluster — everyone orders heavily when worried about supply shortages, creating oversupply when inventories reach end customers, followed by order cancellations and inventory digestion.

The 2021–2022 "chip shortage" — when pandemic-driven demand surge coincided with pandemic-disrupted supply — gave way to a severe inventory correction in 2022–2023, with many semiconductor companies reporting significant earnings declines. The correction was followed by a sharp recovery in 2023–2024, driven primarily by AI-related GPU demand.

Investors in semiconductors need to distinguish between:

• AI/data centre demand: More structural, driven by the multi-year capital expenditure plans of hyperscalers (Microsoft, Amazon, Google, Meta). Less cyclical in the short term, though susceptible to investment cycle slowdowns.
• Consumer electronics demand: Smartphones, PCs, and consumer devices are cyclical. The PC cycle in particular is well-established and mean-reverts over 3–5 year periods.
• Automotive demand: As cars become more sophisticated, semiconductor content per vehicle has grown sharply. However, automotive demand is also subject to production cycles and EV adoption rates.
• Industrial and IoT: Generally more stable but also slower-growing than the above.

Geopolitical Risk: The Central Tension

Semiconductors have become a central battleground in US-China geopolitical competition. The US government has used export controls — first targeting Huawei's supply chain in 2019, then expanding to restrict China's access to advanced AI chips (Nvidia H100, A100) and manufacturing equipment (ASML EUV machines) — to limit China's ability to develop leading-edge semiconductor capability.

China's response has been a massive state-directed investment programme in domestic chip manufacturing, materials, and equipment. Chinese semiconductor investment runs into hundreds of billions of dollars, though as of 2026, China's domestic capability remains significantly behind the technological frontier.

Key geopolitical risk scenarios for investors:

Taiwan risk: TSMC manufactures approximately 60% of the world's semiconductors and over 90% of the most advanced chips. A conflict in the Taiwan Strait — or even a serious escalation of tensions — would represent a catastrophic supply shock to the global economy. This risk cannot be eliminated by portfolio construction; it is a systemic risk.

Export control escalation: Continued tightening of US and allied export controls on chips and equipment could affect revenues of US and European equipment and chip companies that sell to China. Chinese revenues are material for many semiconductor equipment companies.

China retaliation: China controls significant portions of the supply chain for materials used in chip manufacturing, including gallium and germanium. Export restrictions on these materials have already been imposed and could be tightened.

ETFs for Semiconductor Exposure

• VanEck Semiconductor ETF (SMH): One of the most widely used semiconductor ETFs; concentrated in the largest semiconductor companies globally; dominated by Nvidia, TSMC, and Broadcom
• iShares Semiconductor ETF (SOXX): Similar composition to SMH; US-centric but includes TSMC
• Xtrackers MSCI World Semiconductors UCITS ETF: Available on UK platforms; UCITS-compliant; broader exposure
• SPDR S&P Semiconductor ETF (XSD): Equal-weighted approach, giving more exposure to mid-cap semiconductor companies relative to market-cap-weighted funds

These ETFs are significantly concentrated — the top five holdings often account for 40–50% of assets — and can experience sharp volatility. They should be treated as satellite exposures rather than core diversified holdings.

Portfolio Construction Considerations

For HNW investors considering semiconductor exposure:

Within a technology allocation: Semiconductors often feature within broader technology sector funds. Dedicated semiconductor ETFs provide concentrated exposure for investors with specific conviction.

Cyclicality management: Given the pronounced cycle, valuation timing matters more in semiconductors than in more stable sectors. Entering when inventory cycles are bottoming and valuations are compressed tends to generate better outcomes than chasing momentum at cycle peaks.

Geographic diversification within the sector: The supply chain spans the US, Taiwan, South Korea, Japan, the Netherlands, and China. Exposure to different parts of the chain provides some geographic diversification within the sector.

Active vs. passive: Some active fund managers specialising in technology (including Technology sector investment trusts such as Polar Capital Technology Trust and Allianz Technology Trust) have generated alpha in semiconductor selection through fundamental analysis of the technology roadmap and cycle positioning.

How Global Investments Can Help

Semiconductors sit at the intersection of cutting-edge technology, geopolitical strategy, and complex supply chain economics. Building appropriate exposure requires understanding the different sub-segments, cycle dynamics, and geopolitical risks — and positioning the semiconductor allocation appropriately within a broader equity portfolio.

At Global Investments, we help clients assess semiconductor exposure within their technology and growth allocations, drawing on specialist research and access to both active and passive strategies. Contact our team to discuss how semiconductor and technology sector exposure fits into your overall investment approach.

This guide is for information purposes only and does not constitute financial advice. Semiconductor investments involve significant volatility and sector-specific risks. The value of investments can fall as well as rise. Geopolitical risks and technology change can materially affect returns. Always seek qualified professional advice before making investment decisions.