Key points:
- The semiconductor business is fading – bear ETFs do well
- Leveraged ETFs are risky precisely because they are leveraged
- The Direxion leveraged semiconductor ETF has returns precisely because of risk
The Direxion Daily Semiconductor Bear 3X Shares (NYSEARCHA: SOXS) stock price is up some 50% in only two weeks. This is, of course the counterpart to the Direxion Daily Semiconductor Bull 3X Share (NYSEARCHA: SOXL) stock having had a torrid time and falling heavily just recently. The two can be thought of as inverses of each other even if that's not wholly and exactly the way that it works out. It does and should with short term price movements but as leveraged ETFs over the longer term they're not mirror images of each other. Just the way that bull and bear ETFs need to be constructed.
The aim of this, the Bear variant from Direxion, is that the ETF stock price should return a 300% version of movements in the underlying target index, the ICE Semiconductor Index (ICESEMIT). But, obviously, the Bear version, SOXS, is looking for 300% of the returns in a short or downward direction of that index.
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As a leveraged ETF this is not a good long term bet and retail investors simply should not think of it as being that. By construction the leverage means that the ETF will lose value over the long term. This goes double for bear or short ETFs, as the construction requires that the ETF manager borrow and short stock – there are borrowing costs – and or use options, which all have a time value attached to them. So this absolutely is not a buy and hold opportunity.
Quite the contrary, a leveraged ETC like the Direxion Semi is an opportunity to speculate in the movements of the semiconductor sector. This is for very short-term targets or trades, the sort that might play out immediately or over a couple of days, no more. The inbuilt value loss from the construction makes SOXS valid for such situations, or perhaps for hedging against other positions, but not as a hold for any length of time.
Back on the 7th of this month SOXS was trading around the $40 level – today it's around the $65. That's a significantly more than 50% rise in only two weeks. But of course that gain is bought at considerable risk – the Bull version of the same ETF, SOXL, is down by a similar amount given the inverse relationship between the two.
The cause here is likely the Federal Reserve's rises in interest rates. This makes tech as a whole less attractive relative to profitable and dividend paying stocks. Further, interest rate rises have made crypot less attractive, something we've seen in the falling prices of mining rigs – something that obviously affects semiconductor companies.
Leveraged ETFs have their place, which is to try to take advantage of immediate and specific moves in underlying indices as a result of significant market changes. Their constriction, and very leverage, make them highly risky places which is the counterpart ot their high potential returns. That same construction also makes them simply not suitable for any sort of buy and hold strategy. That's not what they're for so don't use them that way.