Two years ago, President Biden signed the CHIPS and Science Act into law. Certainly, assuming it’s implemented to its fullest potential, the legislation could be a boon for a variety of semiconductor stocks.
That group includes the VanEck Semiconductor ETF (SMH), which is one of the largest funds in the category. Some marquee SMH holdings, including Taiwan Semiconductor (TSM) and Intel (INTC), are among the chipmakers on the receiving end of billions of dollars from the federal government. Additionally, that spending aims at reshoring semiconductor production in the U.S.
Government spending doesn’t represent the limits of the CHIPS Act’s relevance. As experienced investors know, government isn’t always efficient and the timing of spending can be unpredictable. However, the law has spurred $450 billion in private sector expenditures according to the Semiconductor Industry Association.
It’s Fabulous to Be Fabless
The CHIPS Act is particularly relevant to chipmakers that don’t own their own factories. Instead, they farm out production of their designed chips to firms such as Taiwan Semi. That describes a significant portion of the SMH lineup.
Those companies, including the likes of Nvidia (NVDA), Broadcom (AVGO), Advanced Micro Devices (AMD), and Qualcomm (QCOM), are what’s known as fabless chip firms. The CHIPS Act benefit those companies and rivals by bringing more fabs to the U.S. This in turn could increase efficiencies and lower output costs.
“As more fabs come online, chip designers will have greater flexibility in choosing manufacturing partners. This flexibility allows them to scale production quickly in response to market demands, reducing the risk of supply chain disruptions,” noted Nick Frasse, associate product manager at VanEck.
Expanded domestic production capacity may limit supply chain disruptions. Reliance on foreign labor and manufacturing may decrease. In their own rights, those are compelling elements of the CHIPS Act. Furthermore, For fabless SMH member firms, limiting potential headaches allows on design and innovation. That’s potentially good news for investors.
“While the primary goal is to secure supply chains and reduce dependency on foreign manufacturing, the benefits for chip designers are clear,” concluded Frasse. “Increased manufacturing capacity, driven by substantial investments, could create a more competitive environment, lowering production costs and improving access to advanced technologies. Fabless, aka Chip design companies, can leverage these advantages and focus on innovation and development, ultimately benefiting from global semiconductor production’s increased flexibility and scalability.”
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