Leveraged semiconductor funds have lost far more than the chip sell-off alone would suggest. The iShares Semiconductor ETF is down roughly 25% from its June 22 peak, while the 3x version has plunged nearly two-thirds — a gap created by daily resets, not a broken fund. The 200 largest leveraged ETFs still represent more than $400 billion in notional value, according to Baird Strategas.
The semiconductor sell-off has punished investors across the board, and leverage has made the damage far harder to recover from. The iShares Semiconductor ETF (SOXX) has fallen roughly 25% from its June 22 peak. Over the same stretch, the Direxion Daily Semiconductor Bull 3X Shares (SOXL) has plunged nearly two-thirds.
Why SOXL's loss is not simply three times SOXX's
It would be easy to assume SOXL should be down three times the SOXX loss of 25%, or 75%. But the fund did not malfunction: it is designed to deliver three times the daily return of the NYSE Semiconductor Index. Daily is the key word.
The fund resets its exposure after every session, and the next day's gain or loss then compounds from a new starting value. As a result, its return over several weeks will not necessarily equal three times the semiconductor index's return over that period.
That structure can work spectacularly when chip stocks keep moving steadily higher. Volatile sell-offs, or even just a choppy, sideways market, expose the pitfalls of leverage that resets daily.
The climb back is much steeper
The loss also makes recovery harder. SOXX needs a gain of roughly 33% to erase the 25% decline. SOXL would need to rally around 170% to recover from a 63% plunge.
Leveraged ETFs still carry more than $400 billion
Wall Street increasingly wraps leverage around some of the market's most volatile trades. It was already rolling out leveraged products tied to SpaceX only days after its IPO.
Investors also still have plenty riding on these products. According to Baird Strategas, the 200 largest leveraged ETFs represent more than $400 billion in notional value, reflecting the total market exposure after leverage is applied. That figure has dropped by roughly $100 billion over the past month but remains close to record territory.
The decline may look enormous in dollars. Measured against the leveraged ETF boom that preceded it, however, Baird Strategas' chief ETF strategist Todd Sohn described the retreat more bluntly: "Barely a scratch here thus far."
Source: Yahoo Finance
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