Direxion Daily Semiconductor 3x Bull Shares ETF: Risk And Reward Profile Not Attractive
Summary
- SOXL seeks to provide 3x the daily investment return of the Philadelphia Semiconductor Sector Index.
- The fund is a good choice for investors with a short-term investment horizon.
- On the other hand, this fund may underperform if it is held for the long-term.
- Given near-term uncertainties caused by COVID-19 and Huawei ban and the surge of its fund price due to market optimism, the risk and reward profile is not attractive.
ETF Overview
Direxion Daily Semiconductor 3x Bull Shares ETF (NYSEARCA:SOXL) aims to seek 3x the daily investment return of the Philadelphia Semiconductor Sector Index ("PHLX"). The fund has very high risk as it uses leverage achieve 3x of the daily returns of the index. Although it may offer substantial returns, it can also result in substantial losses if the index declines. The fund is not a good long-term investment choice and is only suitable for investors with a short-term investment horizon. Given the fact that the semiconductor industry is facing some near-term uncertainties, we think it may be better for investors to stay on the sidelines.
Fund Analysis
SOXL is a leveraged-ETF
Unlike other ETFs that only include stocks and some cash in their portfolios, SOXL uses financial derivatives and debt to amplify the daily performance of PHLX. In fact, as the title of SOXL suggests, it seeks to leverage the performance by 3x the result of the daily return. Therefore, investors may be able to magnify its return by 3x in a particular day. On the other hand, SOXL’s fund value can shrink quickly if PHLX declines in value. Therefore, leveraged ETF is a double-edged sword and the risk is very high. Therefore, SOXL is only suitable for investors with experience and willing to take on high risks.
This ETF is not a long-term play
Like any other leveraged ETFs, SOXL is not suitable to own in the long-term. There are several reasons. First, it has a much higher expense ratio of 0.96% than regular ETF that tracks the PHLX. Other ETFs such as iShares PHLX SOX Semiconductor Sector Index ETF (SOXX) has a much lower ratio of 0.46%. Second, SOXL rebalances daily. Since leverage needs to be reset on a daily basis, there is a high likelihood that SOXL will underperform the PHLX index. Let us use a simple example and assume that SOXX and SOXL's price starts at $100 per unit. In an ideal world where there is no expenses, if SOXX declined by 5% in one day, SOXL's fund value will decline by 15%. Hence, SOXX's price will decline to $95 and SOXL will decline to $85. The next day, if SOXX gained 5%, its price will return to $99.75. Hence, the loss will be 0.25% over two days. Many investors might think that SOXL's value would loss by about 0.75%. However, since SOXL resets daily, its fund price will only climb to $97.75 (a 15% gain from $85). Therefore, the actual loss is magnified to 2.25% instead of 0.75%. Therefore, the fact that SOXL rebalances daily makes it only suitable for investors with a short-term investment horizon. As can be seen from the chart below, SOXL’s fund performance of 59.7% in the past 3 year is much lower than SOXX’s 75.6%.
Should you be bullish on the semiconductor industry now?
Now that we have discussed some fundamentals of SOXL, we will discuss whether this ETF is a good choice to invest in the near-term. We know that the semiconductor industry has the potential to grow its market by a growth rate of 4% annually from 2020 to 2024. However, as we have discussed earlier, SOXL is not a fund suitable for investors with a long-term investment horizon. Therefore, we need to consider if the semiconductor industry will grow in the second half of 2020. According to IDC, the semiconductor industry is expected to decline by 7.2% in 2020 (excluding DRAM and flash). Decline is expected to be broad-based across different segments due to the impact of COVID-19 (see table below). Although the U.S. job report in May appears to be very positive, much of the semiconductor industry growth also depends on emerging markets. Given the fact that many emerging markets are also experiencing challenges due to COVID-19, it is hard to be very optimistic.
Growth in 2020 (%) | |
Smartphone | -6% |
Consumer areas | -11.5% |
Automotive | -14% |
Industrial | -11.4% |
Source: Created by author; IDC
In the near-term, the semiconductor industry may also be impacted by the U.S. government’s policy towards banning semiconductor exports to China’s Huawei Technologies. This may suppress semiconductor demand also. Given these near-term headwinds, it appears that SOXL is not the best place to invest right now.
Investor Takeaway
As we have discussed in our article, we believe SOXL is only suitable for experienced investors that have a short-term investment horizon. Given the fact that the semiconductor industry is facing some near-term headwinds, the risk and reward profile is not attractive. Therefore, we think it may be better to wait on the sidelines.
This article was written by
Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (8)
At its March, 2010 inception, the opening price was $9.6375. Today's closing price was $193.16. That is a long term gain of $183.62 per share, a long term gain of 1904%. The chart and records indicate that SOXL offers an adequate rate of return for a long term investor. I frequently see published opinions that 3X ETF's are not long term investments, but history, charts, and records prove otherwise. 3X ETF's offer better total return than their 1X counterparts. Yes, they are three times as volatile as the 1X, but long term buy and hold investors gain inexpensive leverage and desire the better return on investment. Certainly 3X ETF's are not for the emotional investor who is subject to buy at a euphoric high, and sell at a fear driven low. For the less emotional long term holder, 3X ETF's offer opportunity.
Long and strong SPXL, TQQQ, TECL, SOXL, and FNGU.
Thank you. You cover many areas and questions. The short answer is look at the long term chart since inception on 11 March 2010. Recalibrated for all of the dividend distributions, opening price equates to $0.6425. (Of course, the actual price was never that low.) Closing price on Friday was $11.60. Simple math shows an increase of 1705.45%, or about 17 times original purchase price. That is an indication.
My chart, using comparison, shows current price is 1538.42% gain over the twelve years. By comparison, for the same time period,
.NDX, the Nasdaq 100, has gained 479.10%.
.IXIC, the Nasdaq, has gained 352.13%.
.SPX, the S&P 500, has gained 222.35%
Comparison of long-term market price movement offers real, truthful, factual information upon which to begin building the case for how any stock or ETF is doing through history. The facts have nothing to do with the opinions, false judgments, vain imaginings, and mistaken perceptions of those on this site who persist in voicing false ideas of what they "think" because they think that because they think it, it must be true. Not so. Facts and charts and actual numbers and percentages provided by third parties (I am using Fidelity provided numbers and charts) are reality, history, not imagined opinions.
I would not recommend one hold SOXL (or any 3X ETF like FNGU, SPXL, TECL, TQQQ, or UDOW) through a secular bear cycle such as we experienced from March 23, 2000 to April 19, 2013.
However, during the current 20-year secular Bull cycle, the Bull trend is our friend, so holding for the entire cycle (2013 to 2033) will ultimately be beneficial.
This current one-year consolidation/trading range has been especially brutal. However, will recover and new all-time highs will return. Let me mention that these consolidations do occur on a regular basis throughout the twenty-year secular Bull cycle, are normal and to be expected, just as the secular cycles are normal and to be expected. ANG Trader occasionally posts the purple box and pink box charts that show these repeating patterns. I follow him and study his charts. I recommend any serious investor must understand these fractals, recurring price patterns, and adjust their portfolios accordingly. They give a better visualization than I can give here in words.So, your example uses just two days, and is not indicative of the secular Bull cycle because many more than half the days are gains. More up days than down days. If you used a three day math calculation with two up days and one down day, you would see a difference. If you use a long-term chart, you will see a realistic result unlike the one day up, one day down example.
Yes, I held parts of my positions since the start of this consolidation on January 4, 2022. Would not do it again. I just missed the top, then missed the realization that this is a 19+% decline within a "trading range"/consolidation. Got partially out after half the drop, but sometimes the decline is only 14%, so I did not want to take a chance at missing the recovery. Bad for me. Nor did I, or anyone I know, expect the S&P to drop 24%, or the Nasdaq to drop 30%.
The redeeming factor is in knowing this too will pass, a bottom will/has formed, a recovery will happen, and in about one-year after it started, we will breakeven at SPX 4818 and breakout to a Bull leg of new all-time highs. Do not sell at the bottom and miss the normal, natural, and to be expected recovery. If one has cash, then near this bottom buy all that you can, then be patient. Wait for the inevitable recovery and next Bull leg. Hold instead of sell. Buy instead of sell, Be patient instead of worried or fearful. Study the long-term charts, the fractals, and the secular cycles over the last hundred years to understand the future pattern that will repeat the many previous patterns.
Hope this helps.
Happy investing! It's a Bull market, you know, a Bull trend, and this is a normal and to be expected consolidation during the Bull cycle. It is not "different this time."
Just substantiated, provable and researched facts. No opinions, please.
Tkr Date Price Price %Gain Ratio
***** ***** ***** ***** ***** *****
TQQQ 2/11/2010 $1.63 $93.94 5663.19% 12.17
QQQ 2/11/2010 $43.03 $243.30 465.42% *****
***** ***** ***** ***** ***** *****Stock Entry Begin Last Trade Gain
Tkr Date Price Price %Gain Ratio
***** ***** ***** ***** ***** *****
UDOW 2/11/2010 $6.62 $76.51 1055.74% 6.13
DIA 2/11/2010 $100.42 $273.38 172.24% *****
***** ***** ***** ***** ***** *****Stock Entry Begin Last Trade Gain
Tkr Date Price Price %Gain Ratio
***** ***** ***** ***** ***** *****
SOXL 3/11/2010 $9.64 $193.16 1903.73% 4.13
SOXX 3/11/2010 $48.42 $271.86 461.46% *****
***** ***** ***** ***** ***** *****Stock Entry Begin Last Trade Gain
Tkr Date Price Price %Gain Ratio
***** ***** ***** ***** ***** *****
SPXL 11/5/2008 $4.81 $47.42 885.86% 3.97
SPY 11/5/2008 $99.20 $320.79 223.38% *****
***** ***** ***** ***** ***** *****