Semiconductor Stocks on a Tear – But Beware This Fund 🚨

Tracking the financial pro ticker searches can reveal patterns most investors overlook.

However, you don’t want to assume a ticker is popular because they all want to buy it.

The Direxion Daily Semiconductor Bull 3x Shares (SOXL) is a perfect example.

No fund manager in their right mind would hold a 3x leveraged ETF. They have cheaper and easier ways to achieve the same exposure.

However, they’ll often use these funds as hedging instruments.

And that’s why we’re interested in the SOXL.

While it’s not a fund we’d recommend holding for more than a few days, the heavy search history coincides with a marked rise in semiconductor stocks.

Key Facts About SOXL

• Net assets: $5.41 billion
• 12-month trailing yield: 0.90%
• Inception: May 11, 2010
• Expense ratio: 0.90%
• Number of holdings: N/A

Direxion’s Daily Semiconductor Bull 3x ETF tracks 3x the daily movement of the ICE Semiconductor Index.

The ICE Semiconductor Index is a rules-based, modified float-adjusted market-cap weighted index of the 30 largest U.S. semiconductor companies.

In layman’s terms – it’s the biggest and most liquid semiconductor companies in the U.S. That means you won’t get exposure to Taiwan Semiconductor, one of the largest microprocessor manufacturers in the world.

Source: Direxion

With 3x leverage, the fund loses value over time if it’s not moving perpetually higher.

Here’s some simple math to show why.

Say an index goes up 10% from $100 to $110. This ETF would go up 30% to $130.

The next day, the index dropped 9.1% back to $100. The leveraged ETF would drop to $94.55.

Performance

This natural price erosion is a big reason why 3x leveraged ETFs aren’t great products to hold over time.

The performance below shows a nice 5-year gain.

Source: Direxion

However, you’ll find in the next section the unleveraged SOXX outperformed the SOXL over the same 5-year period.

Competition

Our comparison pulls together an inverse leveraged ETF and a few unleveraged ones.

• VanEck Vectors Semiconductor ETF (SMH): The SMH is the gold standard for semiconductor ETFs with the most assets under management, tracking the top 25 largest U.S. semiconductor companies.
• Direxion Daily Semiconductor Bear 3x Shares (SOXS): Opposite the SOXL is the SOXS, which tracks the inverse price movement with 3x leverage. This is a very dangerous product to hold and should only be considered for trading or short-term hedging.
• iShares Semiconductor ETF (SOXX): The SOXX is the unleveraged version of the SOXL, tracking the same index 1 for 1.
• SPDR S&P Semiconductor ETF (XSD): If you’re looking to invest in more small and medium cap companies, the XSD does just that while maintaining a U.S. focus.

As shown below, the top performing ETFs are the ones that do not cap weighting and focus on the largest companies.

Our Opinion 4/10 

We would caution against holding any leveraged ETF, much less one with 3x leverage.

In the short term, these can be great hedging instruments on diversified and high-net-worth portfolios.

The best way to play these while managing risk is through options rather than owning them directly. 

We’ve seen these leveraged funds blow up before. You don’t want to be left holding the bag.