Taiwan Semiconductor Manufacturing Company — TSMC — is one of the most consequential companies in the global economy. It is also the largest single constituent of Taiwan's benchmark equity index by an enormous margin. The concentration is so extreme that any analysis of the Taiwan equity market that does not begin with TSMC is missing the central fact of the market. Understanding what this concentration means, and what it does not mean, is the entry point to any serious view on Taiwan.

The scale of the concentration

TSMC represents roughly 30–35% of the TWII (TAIEX) index by market capitalisation. The top ten constituents of the TWII together account for over half the index. This concentration is extreme by developed-market standards — the top ten in the S&P 500 account for perhaps 30%, in the FTSE 100 perhaps 45%, and TWII sits well above both.

For an investor holding the Taiwan index, roughly one dollar in three is directly TSMC exposure. The remaining two dollars are heavily concentrated in a small number of other technology companies (Foxconn/Hon Hai, Mediatek, ASE Technology), plus a mixture of financial services (CTBC, Cathay), petrochemicals (Formosa Plastics, Nan Ya Plastics), and a long tail of smaller industrial names.

The composition means TWII is, functionally, a Taiwan technology sector bet with a small diversification tail — not a diversified broad-market index in the way S&P 500 or FTSE 100 are.

Why TSMC has become this dominant

TSMC's rise to global semiconductor dominance is one of the most-studied business trajectories of the past four decades. Founded in 1987 as a pure-play foundry — a manufacturer of chips designed by other companies — TSMC pioneered the business model that separated chip design from chip manufacturing. This separation enabled the fabless chip designers (Nvidia, Qualcomm, AMD, Broadcom, Apple) to scale without the capital burden of building their own fabs.

TSMC's technical leadership at leading-edge process nodes has widened over the past decade. Its 5-nanometer, 3-nanometer, and forthcoming 2-nanometer nodes are ahead of any competitor. Intel's foundry business has been trying to catch up but remains multiple years behind on production-ready leading-edge capacity. Samsung's foundry is closer but has struggled with yield issues at its most advanced nodes. This technical leadership is the source of TSMC's economic position and, by extension, of its dominance of the Taiwan index.

The AI acceleration effect

The AI cycle has magnified TSMC's importance. Nvidia's AI accelerators — the H100, H200, and successor generations — are all manufactured by TSMC. AMD's competing accelerators are TSMC-manufactured. Custom AI chips from the hyperscalers (Google's TPUs, Amazon's Trainium, Microsoft's Maia) are largely TSMC-manufactured. Apple's silicon is TSMC-manufactured.

Essentially every advanced AI chip in the current cycle passes through TSMC's fabs. The company has become a bottleneck in the AI supply chain, which has translated into revenue growth and margin expansion that few semiconductor companies have ever matched. TSMC's revenue has grown from roughly $50 billion annually in 2020 to more than $100 billion in 2026.

The consequences for TWII of this trajectory are enormous. When TSMC's earnings surged in 2023–2024, the TWII surged with it. When TSMC's stock corrected in periodic profit-taking episodes, the TWII corrected with it. The correlation between TSMC's stock and the index is high enough that many portfolio managers describe TWII as "TSMC plus other stuff."

The geopolitical dimension

The single most-discussed risk factor for TSMC — and by extension for the Taiwan equity market — is the geopolitical position of Taiwan itself. The concentration of the world's advanced logic capacity in Taiwan, and specifically at TSMC's Hsinchu and Tainan fabs, means that any disruption to Taiwan's political stability would have consequences that extend far beyond the company or the country.

Every major economy has responded to this concentration risk with policies designed to bring some leading-edge semiconductor manufacturing capacity onto their own territory. The US CHIPS Act, the EU Chips Act, Japan's semiconductor subsidy programs, and various other national initiatives all reflect the same concern. TSMC itself has responded by building fabs in the US (Arizona), Japan (Kumamoto), and Germany (Dresden) — though the total capacity being built outside Taiwan will remain a small fraction of the company's overall footprint for the foreseeable future.

Whether this diversification will meaningfully reduce the concentration risk over any reasonable time horizon is doubtful. Building leading-edge fabs takes 5–10 years and tens of billions of dollars. Even if all currently-announced non-Taiwan capacity comes online on schedule, TSMC's Taiwan operations will still account for the vast majority of its leading-edge production a decade from now.

The other Taiwan companies

The 65–70% of TWII that is not TSMC is worth some attention.

Hon Hai / Foxconn is the largest contract electronics manufacturer in the world. It manufactures iPhones, various other Apple products, and consumer electronics for many other brands. Its business is enormous in revenue but relatively low-margin, so its market cap is much smaller than TSMC's despite comparable revenue.

Mediatek is a fabless chip designer specialising in smartphone SoCs, particularly in the mid-market segment. It competes with Qualcomm in mobile processors and has become one of the largest fabless designers by unit volume.

ASE Technology is one of the world's largest semiconductor assembly and test (OSAT) providers. It sits alongside TSMC in the Taiwan semiconductor ecosystem, providing packaging services for chips manufactured by TSMC and others.

Financial services and petrochemicals round out the diversification tail. These sectors provide some exposure that is not directly correlated with the technology cycle but represent a small fraction of index weight.

The frame this implies

The Taiwan equity index is, in essence, a highly concentrated bet on TSMC and a smaller number of related technology names. It is not a diversified developed-market equity exposure in any meaningful sense. Investors who want exposure to Taiwan should understand that they are primarily buying a leveraged play on TSMC and the broader Taiwan semiconductor ecosystem, with a small dividend of exposure to other Taiwan sectors.

For an investor who wants pure TSMC exposure, the ADR (TSM on NYSE) provides it directly. For an investor who wants broader Taiwan equity exposure, the TWII index provides it at the cost of accepting the geopolitical concentration risk that comes with the sector exposure. Neither is obviously the right choice — the trade-off depends on the specific exposure the investor is trying to achieve.

Educational content only. Not investment advice.