The Direxion Daily Semiconductor Bull 3x Shares ETF (NYSEARCA:SOXL) is gaining a lot of attention today. That is, for an exchange-traded fund. Most ETFs trade under the radar, and are lower-volatility instruments by nature. Accordingly, large one-day moves are not typical, unless sector-specific catalysts take hold. In this case, ETF-specific catalysts appear to be driving these shares lower. On Feb. 29, Direxion ordered a SOXL split which came into effect today.
This move comes as the semiconductor space remains under pressure due to near-term shortages. This has led SOXL to a one-day drop of more than 6% at the time of writing.
Let’s dive into this more.
What Does the SOXL Split Mean for Investors?
Forward stock splits like the SOXL split act as a way to increase the share count by issuing shares to existing investors. The overall value of your investment, and of the company, does not change. For instance, if you held 10 shares of the SOXL ETF prior to the split, you would hold 150 now. However, their overall value would be the same.
Because SOXL is a leveraged ETF, these ETFs provide higher volatility than the average ETF on a daily basis. By using leverage, these funds are able to provide traders (not really investors) with three times the daily return on an investment. This can result in a highly lucrative, or potentially dangerous, short-term investment. A number of leveraged ETFs tracking oil went bust following the mayhem we saw with oil prices last March going negative.
For those looking to trade news, or are betting on a one-sided directional short-term move, these ETFs can be a useful tool. For long-term investors, these tend to be ETFs that one ought to avoid.
Chip Shortages Driving Volatility Today
It appears there’s broad market concern right now over chip shortages in the semiconductor space.
This factor has driven the sector down today. Shares of some of the largest chip manufacturers are all down between 1%-2%. The negative return we’re seeing with SOXL thus makes sense.
Again, this ETF is one for traders only. Investors looking to buy the dip on semiconductors should focus their attention on the underlying companies. This ETF essentially represents the sector on steroids, so unless one is very bullish short term, it’s not a place I’d park cash right now.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.