Why chips matter
Almost every modern product contains semiconductors: phones, laptops, cars, medical devices, factory robots and the servers behind every website. Demand has grown for decades as more things become electronic and as data centres expand.
That long-term growth is real, but it does not arrive smoothly. Understanding why is the most important part of investing in this industry.
The cycle
Building a chip factory takes years and costs billions. When demand is strong, companies order more capacity. By the time it arrives, demand has often cooled, leaving too many chips and falling prices. Then spending is cut, supply tightens, and the cycle starts again.
Share prices tend to exaggerate these swings. Large rises and large falls within a single year are normal for this industry, not a sign that something unusual is happening.
Chokepoints
A few steps in the chain are controlled by very few companies. One company makes the most advanced chip-making machines. A small number of factories can produce the most advanced chips. That gives those companies strong positions, and it also means a problem at one of them affects the whole industry.
Choosing your mix
A portfolio of only chip designers is a bet on a few products selling well. Adding manufacturers and equipment makers spreads the bet across the whole chain, because they supply every designer.
Many semiconductor funds are weighted by company size, so two or three giants can make up a large share. If you build your own mix, a cap per company keeps it more balanced.
The parts of the chip industry
Designers
Design chips and pay others to manufacture them.
For example: Nvidia, AMD, Qualcomm
Manufacturers (foundries)
Run the factories that physically make chips, often for many different designers.
For example: TSMC, Samsung Electronics, Intel
Equipment makers
Build the highly specialised machines chip factories depend on.
For example: ASML, Applied Materials, Lam Research
Memory producers
Make the chips that store data. Prices here rise and fall sharply.
For example: Micron, SK Hynix, Samsung Electronics
Design software
Sell the software engineers use to design chips.
For example: Synopsys, Cadence
Companies are listed to show what each category means. They are not recommendations, and the list is not complete.
Three ways to invest
There is no single right route. Many people combine them, and plenty decide a broad global fund is all they need.
- 1
Buy individual shares
Pick one or more chip companies and buy their shares through a broker or investing app.
- Good for
- Simple to understand. You own exactly what you chose.
- Watch out for
- If you only hold a few companies, one bad result can do real damage. Picking winners is hard, even for professionals.
- 2
Buy a ready-made fund
A fund (often an ETF) holds dozens of companies in one purchase. Examples include the iShares Semiconductor ETF (SOXX) and VanEck Semiconductor ETF (SMH) in the US, and the VanEck Semiconductor UCITS ETF in the UK and Europe.
- Good for
- Instant spread across many companies, with very little effort.
- Watch out for
- You get what the fund provider chose, including companies you may not want. Themed funds usually charge more than broad trackers, so check the yearly fee and the top ten holdings. Which funds you can buy depends on where you live.
- 3
Build your own portfolio
Choose your own mix of companies and how much of each, then buy them through your broker. This is what Arithmos helps with: describe the mix in a sentence and it builds and tests one for you to consider.
- Good for
- You decide exactly what is in and what is out, and you can see the reason for every company.
- Watch out for
- More to look after than a fund. Buying many separate shares can cost more in dealing fees, and a tested result is a simulation, not a promise.
The risks
- Cyclicality. Periods of shortage are followed by oversupply, and profits and share prices can fall quickly.
- Concentration. A few companies dominate most semiconductor funds.
- Geopolitics. Advanced manufacturing is concentrated in Taiwan and South Korea, and governments restrict which chips can be sold to which countries.
- Capital intensity. Factories are extremely expensive, so a wrong bet on demand is costly.
- Currency. Many of the largest companies are listed outside your home country, so exchange rates affect your returns.
Try it yourself
The quickest way to understand a portfolio is to look at one. Here is how to turn this guide into something you can inspect.
- 1
Start from the idea
The button below opens the builder with this guide's idea already typed in. Change any part of it: the number of companies, the countries, the limit per company.
- 2
Read the reason for every company
You get a list of companies, how much of each, and a plain-English reason for each pick. If one looks wrong to you, you can ask for it to be changed.
- 3
Look at the bad years, not just the good ones
The portfolio is replayed against real past prices. Check the biggest fall along the way, and ask yourself whether you could have sat through it.
- 4
Decide for yourself
If you want to act on it, you buy the shares yourself through your own broker. Arithmos never holds your money or places trades.
“The 15 biggest computer-chip companies in the world, covering chip designers, chip manufacturers and the companies that make chip-making machines, with no company over 12%.”
Browsing portfolios other people have published is free. See pricing for what building your own includes. A tested result is a simulation using past prices. It is not a forecast and not a recommendation.
Common questions
What is the difference between a chip designer and a foundry?
A designer creates the blueprint for a chip. A foundry is the factory that makes it. Many of the best-known chip companies only design, and rely on a foundry to manufacture their products.
Are semiconductor stocks the same as AI stocks?
They overlap but are not the same. Chips for AI are one part of the industry. Others serve phones, cars, industrial equipment and consumer electronics, and those markets follow their own cycles.
Why do semiconductor shares fall so sharply sometimes?
Because the industry regularly swings between shortage and oversupply. When customers have ordered too much, new orders drop quickly and profits fall with them.
