The S&P 500 has surged nearly 70% in the last 28 months, fueled largely by artificial intelligence (AI) and big tech. Index investors have reaped the rewards, especially those holding funds like the Vanguard S&P 500 ETF (VOO). But there’s a glaring omission in the benchmark index: a key AI player that dominates semiconductor manufacturing globally.
The Missing AI Titan: Taiwan Semiconductor Manufacturing
Taiwan Semiconductor Manufacturing Company (TSMC) is one of the most influential companies in AI, yet it’s absent from the S&P 500. That’s not because of its size—TSMC boasts a market cap exceeding $1 trillion. Instead, its exclusion comes down to S&P Global’s strict criteria. Companies in the index must be headquartered in the U.S., maintain a majority of their assets domestically, and post positive GAAP earnings over the last quarter and trailing 12-month period.
For investors relying solely on S&P 500 index funds, this means missing out on one of the most crucial AI-related stocks.
Why TSMC Matters in AI’s Growth
AI’s rise isn’t just about software and models—it’s also about the hardware that powers them. Nvidia (NVDA), the leader in AI GPUs, doesn’t manufacture its own chips. Instead, it turns to TSMC, which has the cutting-edge fabrication capabilities needed to produce advanced semiconductors.
TSMC’s dominance stems from its ability to develop proprietary processes that make chips more efficient, squeezing transistors closer together to maximize power and speed. In collaboration with customers like Nvidia, Apple, and Broadcom, TSMC refines its chip manufacturing to meet the most demanding AI workloads.
One key advantage TSMC holds:
- It commands more than 60% of the global semiconductor foundry market, far outpacing competitors like Samsung and Intel.
Its scale allows it to reinvest heavily in research and development, ensuring it stays ahead in an industry where technological leadership is everything.
The $40 Billion AI Investment Bet
TSMC isn’t slowing down. In January, management laid out an aggressive growth plan, predicting AI-related revenue to expand 40% annually over the next five years. Overall, the company expects to achieve a 20% compound annual revenue growth rate during that period.
To keep up with demand, TSMC is spending $40 billion on capital expenditures in 2025, a 35% increase from the previous year. That’s a massive bet, but historically, TSMC has been disciplined with its investments, ensuring capital spending aligns with future growth opportunities.
However, the semiconductor industry remains cyclical. During downturns, high overhead costs can pressure profitability, making it essential for investors to consider the timing of their bets.
TSMC’s Stability Compared to AI Chip Designers
AI chip demand is skyrocketing, but not all companies in the space are equal. TSMC holds a unique position because it benefits from AI growth regardless of who dominates the chip design race.
While companies like Google, Microsoft, and Amazon are designing their own AI chips to reduce reliance on Nvidia, they still need a foundry to manufacture them. And right now, TSMC is the only viable option for cutting-edge chip production.
This means that unlike Nvidia, which faces potential competition from emerging AI chip designers, TSMC enjoys a more stable revenue stream from multiple clients.
Should Index Investors Adjust Their Portfolios?
For investors relying on the Vanguard S&P 500 ETF, adding TSMC separately could be a smart move. Given its current $1 trillion market cap, TSMC would hold roughly a 2% weight in the S&P 500 if included.
One potential strategy:
- Investors could shift 2% of their VOO holdings into TSMC to mimic the weighting it would have if it were part of the index.
That way, they aren’t missing out on one of the most pivotal companies in AI’s explosive growth.
TSMC’s stock, trading at 23 times forward earnings estimates, presents an attractive entry point. It offers exposure to AI’s semiconductor backbone without the volatility of individual chip designers, making it a compelling addition to any portfolio focused on long-term tech growth.
