Recently, the AI wave has propelled semiconductors to the forefront of market attention, and I’ve found that many investors still don’t have an in-depth understanding of the Philadelphia Semiconductor Index (SOX). Rather than fixating on individual stocks, it’s better to understand this index, which reflects the overall direction of the entire industry—especially the performance of the SOX constituent stocks.

The SOX index is made up of 30 U.S.-listed semiconductor companies and covers every link in the industry chain, including design, manufacturing, and sales. The index’s historical performance is indeed impressive—its long-term increase has exceeded 1000%, far outperforming the S&P 500. By May 2024, the index had even reached a new high, showing how optimistic the market is about the semiconductor industry.

The bar for inclusion in the SOX constituent stocks is actually not low. Companies must have semiconductors as their core business, a market cap of more than $100 million, be listed on NASDAQ or the NYSE, and meet stock liquidity requirements. Each year in September, constituents are screened again based on the standards to ensure the quality of the component companies.

When it comes to SOX constituent stocks worth paying attention to, NVIDIA (NVDA) is definitely the biggest winner of the AI era, with a market value already surpassing $3 trillion. As the manufacturing leader, TSMC (TSM) derives more than half of its revenue from 5nm and 7nm chips, and future mass production of 3nm chips will further strengthen its competitiveness. ASML (ASML) controls the key lithography technology that is impossible to replace. In recent years, AMD’s market share in the data center sector has risen rapidly, posing a tangible threat to Intel. Companies such as ON Semiconductor (ON) also have huge potential in the electric vehicle field.

If you want to invest in this space, there are mainly two approaches. One is to buy a semiconductor ETF, such as SOXX or domestic funds like 00830 and 00892—the trading is as simple as buying stocks. The other is to track the SOX constituent stocks or the index through contracts for difference (CFDs); this approach is more flexible, enabling two-way trading and allowing you to adjust leverage.

However, risks also need to be taken seriously. The impact of geopolitical factors is growing, and changes in U.S. policies could cut off supply chains. Cyclical fluctuations in demand are another hidden risk—back in 2022, the industry saw a 36% drop. Combined with changes in the macro environment, Federal Reserve policy also places significant pressure on the profitability of technology stocks.

But in the long run, demand in areas such as artificial intelligence, data centers, automotive electronics, and industrial automation continues to grow, and leading companies among the SOX constituent stocks already have plans in these areas. The world’s three largest chip makers plan to invest more than $300 billion to expand production, and governments around the world are also increasing investment in semiconductors. The decline in 2022, in fact, gave long-term investors a better opportunity to enter.

If you want to participate systematically in the growth of the semiconductor industry, it’s a good idea to keep a close watch on the SOX index trend—this is more diversified and carries less risk than tracking individual stocks on your own.