Climate sustainability isn’t just a widely discussed policy issue, it’s a tangible and growing investment theme, too.
Undoubtedly, exchange traded funds are making it easier for investors to express sustainability in their portfolios. Whether it’s by way of companies prioritizing climate change or producers of materials essential to the output of solar panels and wind turbines, an array of ETFs are making inroads into the sustainability theme.
That trend is applicable to some older ETFs, including the VanEck Vectors Semiconductor ETF (SMH). It’s widely known that semiconductors are integral components in a variety of renewable energy and clean technology products, but many investors aren’t aware of the depth of the related opportunity set.
“Efficient high-voltage power conversion/transmission is a gating factor to clean energy adoption in multiple industries. Compound semiconductors will capture and create value by both accelerating adoption of these applications and disrupting the current analog/mixed signal ecosystem,” according to a recent report by a team of Cowen analysts.
The $8.2 billion SMH follows the MVIS US Listed Semiconductor 25 Index and is home to 25 stocks. While the Cowen team doesn’t mention specific chip names that are potential beneficiaries, it’s probable that some SMH member firms are highly relevant in the clean technology conversation. Moreover, it’s clear that some chip makers are intersecting with a growing, evolving disruptive technology.
“The intersection of increasingly stringent CO2 emission regulations, consumer awareness, and acceptance of electric vehicles, coupled with demand for economical renewable energy, is changing the landscape in the power semis market,” added the Cowen analysts. “Instead of being stored in fossil fuels and generated from their combustion, energy is being created, transmitted, and stored in ways that require more advanced technology solutions. This would include silicon and compound semiconductors.”
SMH’s largest holding is Taiwan Semiconductor (NYSE:TSM), which accounts for over 10% of the fund’s weight. That company is one of the dominant operators of chip foundries, putting it front and center in the race to develop semiconductors geared toward climate change and sustainable concepts.
Overall, the next wave of sustainability evolution will be powered by chips, and that could bolster the long-term SMH thesis.
“We forecast the market for silicon (IGBT and medium voltage MOSFETs) still growing through the decade, serving a critical role due to its reliability, scale and cost advantages. That said, we see a larger incremental opportunity for wide bandgap compound semis in high-growth and emerging power conversion applications,” concluded Cowen.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
