Direxion SOXL ETF: How To Trade This Leveraged Play On Semis (NYSEARCA:SOXL)

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Growth-oriented sectors in the stock market have been destroyed this year, to varying degrees. Just about anything that worked in 2021 hasn’t in 2022, and vice versa, with fossil fuel stocks charging higher this year as an example. Fears of a recession are now permeating the market, and growth sectors that were crushed with multiple compression earlier this year on rising rates, inflation, and supply chain constraints are now facing the threat of an economic slowdown. Thus, areas that are both growth-oriented and cyclical continue to get pounded.

One such area is the semiconductors, a group that I have traded often in the past because they are growth-oriented, but they also moved very quickly. That creates a ton of risk, but the reward potential, and sheer number of trading opportunities, is almost unparalleled. The semis have been obliterated in 2022 and continue to make new lows. That’s certainly not what bulls want to see, but I also think there’s opportunity ahead.

There are many ways to express bullishness in semis, including just buying the individual stocks outright. I’ve profiled three names recently that I like including ON Semiconductor, Applied Materials, and Alpha and Omega Semiconductor. But what if you wanted some leveraged exposure? Direxion Shares has you covered with a 3X bull ETF under ticker SOXL (NYSEARCA:SOXL).

In this article, we’ll take a look the ETF in detail, and whether it’s the best way to gain exposure to this lagging group.

What is SOXL?

SOXL is an ETF that invests in public equity markets in the US, through direct share purchases and derivatives. It covers both semiconductor makers, as well as makers of semiconductor equipment, with about an 80/20 mix between the two, respectively. The fund uses futures and swaps to create its leverage, and as a result, it doesn’t just own common stocks like other ETFs that aren’t leveraged. However, the model SOXL uses is common among leveraged ETFs.

SOXL aims to hit 300% of daily returns of the ICE Semiconductor Index, which you can read about here. The index is 30 of the largest semiconductor-related stocks, covering a variety of market caps and liquidity profiles, so it’s reasonably diversified for a one-sector fund. It is market-cap weighted, however, so the big dogs will dominate. Still, with the semiconductor stocks focusing on markedly different areas of the semiconductor market in a lot of cases, an ETF may be better if you don’t want to invest the time in understanding the differences between all the various companies and the markets they serve.

Here’s the holding sheet for the index SOXL tracks for some perspective on what the ETF is trying to replicate on a 3X basis.

SOXL Index factsheet

ICE, Index Factsheet

The weightings above are as of the end of the first quarter, so we’ll get the new Q2 weightings shortly, given we’ve just entered July. But this gives you an idea of the sort of stocks you get in the index, and in what amounts. One thing I like about this index is that since there aren’t any whales in the semiconductor index, you don’t get 20% or 30% weightings in one name like you do with others that include tech megacaps, for example.

But is SOXL the right way to go about gaining exposure to these stocks? Leveraged funds can provide outstanding trading opportunities because they move in huge magnitudes on a regular basis. That’s especially true with a sector that is volatile anyway, which certainly describes the semis. If you’re unfamiliar with leveraged ETFs, I highly encourage you to read this primer on how they work and how they can help (and harm) your investment returns. Leveraged ETFs are not long-term holds and are intended to be trading vehicles. However, for that purpose, which is holding periods measured in days or weeks, they can be pretty powerful.

Now that we’ve gotten an understanding of what we’re looking at, let’s take a look at the chart.

Have we hit bottom?

That’s the question on the minds of semiconductor investors, I would imagine, as 2022 has been about as bad as I can think it could be. As we can see below, SOXL is down ~85% this year, and it can certainly go lower. Leveraged ETFs fall in massive amounts when things are tough, and as we can see, just last Friday, SOXL fell another 11%. These are the kinds of moves that create opportunities for trading, but if you just buy SOXL and hold it, you can get destroyed in a very short period of time. For that reason, I do not recommend SOXL or any other leveraged ETF as a long-term buy and hold.



SOXL’s downtrend is well intact at this point, and I’m not seeing a great deal of signs that we’ve hit bottom. The ETF keeps making lower lows, the accumulation/distribution line is making new lows, and so is the PPO. We can see the PPO’s peaks and valleys are lower on each major price low, which isn’t a good sign. What we need is higher peaks and valleys that indicate selling momentum is slowing. I’m not seeing that.

However, trading opportunities exist, and one way to spot them is with the rate of change, or ROC, which is in the panel second to bottom. I usually use 10 days for ROC and you can see that SOXL has hit a 10-day ROC of -40% on three different occasions this year. That’s something you have to be okay with if you trade leveraged ETFs. If you cannot handle your position falling by 40% in a two-week period, this isn’t for you.

On the plus side, if you’re patient, those massive declines have led to bounces that are tradable. The key here, however, is that SOXL remains in a massive downtrend and that its moves are huge. But because it’s leveraged, SOXL’s chart isn’t necessarily the best way to understand where the semis might be going. You’ll notice the bottom panel plots the correlation of SOXL to SOXX, which is an ETF that tracks the semiconductor index. The correlation is perfect, essentially, so let’s take a look at SOXX to get a better read on when SOXL may be a good long candidate. I recommend this approach with any levered ETF; find the index/fund/etc. that it tracks and chart that for directional indications. Then use the leveraged ETF to express that position, rather than using the leveraged ETF in a vacuum.

SOXX Chart


SOXX’ chart looks very similar to SOXL, which you’d expect given their correlation. However, the magnitudes are totally different, with SOXX being down “only” 40% this year against more than double that for SOXL. I’ll be honest and say that I thought we’d see bottom on SOXX by now, but just like SOXL, I’m not seeing it. There’s still solid bearish momentum, and no signs of it letting up, which means the semiconductor index is a trading candidate and nothing more. There will come a time when the semis are a great buy and hold option, but that time is not right now.

Watch the chart for SOXX for signs that it’s time to get very long the semis, including making a higher low on the price chart, and higher lows on the PPO. We’ve seen neither of those things up to this point, so while I’d like to give a buy recommendation to SOXL, I can’t just yet.

Final Thoughts

Leveraged ETFs can be a great way that is capital efficient to express bullish or bearish positions in a particular market. SOXL is one that I’ve traded a bunch of times for that reason, but for now, it appears the semis are still very much in their downtrend. That means we cannot just buy SOXL and hope for the best, because it could see large declines in the coming weeks despite already losing 85% of its value this year. Don’t be fooled by the low share price, because leveraged ETFs can still move in huge magnitudes irrespective of the YTD loss or gain.

In addition, just because SOXL was $75 to start the year does not mean that’s the opportunity. SOXX would need to double to a new, much higher all-time high just for SOXL to get to the mid-$30s, give or take. The actual price would vary based upon how long the ATH took and the path to get there, but my point is that SOXL has potentially seen its all-time high, never to be reached again. That reinforces to me that this is not a buy and hold instrument, but as a trading candidate, it works.

I just think that for now, you want to stay away from SOXL given we’re in a downtrend. When that changes, so will my stance on SOXL.

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