The pandemic has caused a vast number of unanticipated difficulties, from supply chain issues to furthering a shortage in semiconductor chips globally. While these challenges have been felt everywhere, China, with its rapid electric vehicle (EV) growth and its burgeoning 5G industry, has been heavily impacted by the chip shortage and now is prioritizing creating its own chips.
The U.S. and China have both committed to building up their own semiconductor industries, pouring tens of billions of dollars into an industry that will ultimately provide a lot of self-sufficiency across a lot of sectors, reports KraneShares in a recent white paper. However, unlike the U.S., which already has several chip makers such as Nvidia and Intel, China is starting from the ground up.
China is the global leader in 5G networking technology, with over one million 5G base stations built around the country, ensuring coverage for almost all the major cities. China is estimated to have over 430 million 5G users by 2025, and this year alone saw shipments between January and August of 168 million 5G phones, an 80% growth year-over-year. The U.S., in comparison, is anticipated to have 178 million 5G users by 2025.
The adoption of 5G and the rapid growth expected to continue in China may well cross over into smart home devices, other personal devices outside of smartphones, and the creation of smart cities. All of this will require semiconductors that are more advanced than what is currently available.
China is currently the world leader for EVs, as it’s home to the largest market; 40% of all EV sales worldwide were in China in 2020, and China continues to remain on the cutting edge of the space with the introduction of robo-taxis in five major metropolitan areas. The continued growth of EVs and even internal combustion engine vehicles will create the need for increasingly more sophisticated semiconductors. The cost of the electronics used in vehicles is predicted to make up half of the total cost by 2030, with autonomous driving and other features becoming increasingly more common.
Image source: KraneShares
Investing in Semiconductor and 5G Growth in China
KraneShares anticipates that the increased growth in both of these industries is going to push the demand and the interest to create semiconductor chips at a faster rate than might happen in other countries. Because China is starting from the ground up, it provides investors with an excellent opportunity to gain access to the space and capture the growth in the coming years.
The KraneShares CICC China 5G and Semiconductor ETF (KFVG) invests in the semiconductor and 5G industries in China.
KFVG tracks the performance of the CICC China 5G and Semiconductor Leaders Index, an index that contains the top 30 Chinese companies by free-float market cap that are within the following industries: semiconductor manufacturing, manufacturing equipment and services, internet and data services, electronic equipment manufacturing, electronic components, consumer electronics, computer hardware and storage, and communications equipment and commercial electronics.
The top 30 securities have a cap of 10% of the fund, and KFVG minimizes turnover by not adding a company until it is ranked 25 or higher by Fuzzy Logic, doing business as FastINDX (the index provider), and a company will not be removed until it is below 35th.
The top holdings of the fund are Xiaomi at 7.94%, Will Semiconductor at 6.06%, and Luxshare Precision Industry at 1.70%
KFVG has an expense ratio of 0.64% with fee waivers that end August 1, 2022.
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