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Are Semiconductors Set to Soar?

August 03, 2022

Editor’s note: Any and all references to timeframes longer than one trading day are for purposes of market context only, and not recommendations of any holding timeframe. Daily rebalancing ETFs are not meant to be held unmonitored for long periods. If you don’t have the resources, time or inclination to constantly monitor and manage your positions, leveraged ETFs are not for you.

The semiconductor sector is an integral component to the economy.  As automation becomes more widespread, the demand for computer chips is set to remain elevated.  However, this strong demand hasn’t stopped the sector from experiencing a sharp correction in the past several months.  Another key feature of semiconductors are their tendency to behave as a leading indicator for stocks.  In other words, it’s not unusual to see growth-related sectors peak and bottom out before the broader market.  This makes chips a sector to always monitor closely.

Is there Gain after the Pain?

Semiconductors have been a secular-leading sector since late-2008. Their outperformance hasn’t gone unnoticed, and it became a favorite of many traders and investors over the years.  However, the sector’s drawdown in 2022 has been its worst in over a decade.  The pain in semiconductors was only exacerbated by the chip shortage over the past year, as producers were unable to source the required materials due to supply chain constraints.  But what was a shortage could soon turn into a supply glut, as chip factories race to catch up with pent-up demand.  Once these orders are satisfied though, could the industry face a period of lackluster demand?  For traders that remain keen on the bearish case for semiconductors, Direxion offers the Daily Semiconductor Bear 3x Shares (Ticker: SOXS) fund, which seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the ICE Semiconductor Index.

Below is a daily chart of SOXS as of July 28, 2022:

Source: TradingView.com as of July 28, 2022.

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Semiconductor Story: So Bad That it’s Got to Get Good?

Given the market’s tendency to discount future events, we must consider that all of the negative impacts due to supply and demand dynamics have run their course within the semiconductor sector.  Congress recently passed the CHIPS Act, which is set to subsidize U.S.-made semiconductor chips.  This could turn into a boon for the sector, and perhaps even present an opportunity for bulls.  For traders keen on the bullish outlook, Direxion’s Daily Semiconductor Bull 3x Shares (Ticker: SOXL) fund seeks daily investment results, before fees and expenses, of 300% of the performance of the ICE Semiconductor Index. Some of the funds significant holdings include Advanced Micro Devices (Ticker: AMD), Broadcom (Ticker: AVGO), Intel (Ticker: INTC), and Texas Instruments (Ticker: TXN).  Since these are all U.S.-based chip manufacturers, they are likely to be direct beneficiaries of these new subsidies.

Below is a daily chart of SOXL as of July 28, 2022:

Source: TradingView.com as of July 28, 2022.

Candlestick charts display the high, low (stick), open, and closing prices (body) of a security for a specific period.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost; current performance may be lower or higher than the performance quoted. For the most recent month-end performance go to Direxion.com/etfs. For standardized performance click here.

Key Trading Dates

Although earnings season is well underway, there are several key semiconductor names in the ICE Semiconductor Index that are scheduled to announce earnings in August and September:

TickerNameWeight in the IndexExpected Earnings Release
MCHP UWMicrochip Technology Inc0 039341058/3/2022
NVDA UWNVIDIA Corp0.082906338/24/2022
MU UWMicron Technology Inc0 038004799/28/2022

Additional Growth-Related Opportunities

Betting on semiconductors exclusively does come with some concentration risk.  For traders looking for more broad-based opportunities, Direxion’s Daily Technology Bull 3x Shares (Ticker: TECL) and the Daily Technology Bear 3x Shares (Ticker: TECS), offers traders 300% of the daily upside and downside in the Technology Select Sector Index.  There are also ways to play other, more specific segments within tech.  These include the Daily Cloud Computing Bull 2x Shares (Ticker: CLDL) and the Daily Cloud Computing Bear 2x Shares (Ticker: CLDS) funds, which track 200% of the daily upside and downside in the Indxx USA Cloud Computing Index.  There’s also a Daily Robotics, Artificial Intelligence & Automation Index Bull 2x Shares (Ticker: UBOT) fund, which tracks 200% of the daily upside in the Indxx Global Robotics and Artificial Intelligence Thematic Index.

Leveraged and Inverse ETFs pursue daily leveraged investment objectives which means they are riskier than alternatives which do not use leverage. They seek daily goals and should not be expected to track the underlying index over periods longer than one day. They are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk and who actively manage their investments.

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Investing in a Direxion Shares ETF may be more volatile than investing in broadly diversified funds. The use of leverage by a Fund increases the risk to the Fund. The Direxion Shares ETFs are not suitable for all investors and should be utilized only by sophisticated investors who understand leverage risk, consequences of seeking daily leveraged, or daily inverse leveraged, investment results and intend to actively monitor and manage their investment.

Direxion Shares Risks – An investment in each (the) Fund involves risk, including the possible loss of principal. Each Fund is non-diversified and includes risks associated with the Funds’ concentrating their investments in a particular industry, sector, or geography which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause prices to fluctuate over time. Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk and risks specific to the Information Technology Sector and Cloud Computing Industry. The market prices of internet securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities as these securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices.

Additional risks include, for the Direxion Daily Cloud Computing Bull 2X Shares, Daily Index Correlation Risk, and for the Direxion Daily Cloud Computing Bear 2X Shares, risks related to Shorting and Cash Transactions, and Daily Inverse Index Correlation Risk. Please see the summary and full prospectuses for a more complete description of these and other risks of each (the) Fund. 

Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the Semiconductor Industry. Companies that are in the semiconductor industry may be affected by particular economic or market events, which may, in certain circumstances, cause the value of securities of all companies in the semiconductor sector of the market to decrease. Additional risks include, for the Direxion Daily Semiconductor Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Semiconductor Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions.  Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Risks of each Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the Technology Sector. The value of stocks of information technology companies and companies that rely heavily on technology is particularly vulnerable to rapid changes in technology product cycles. Additional risks include, for the Direxion Daily Technology Bull 3X Shares, Daily Index Correlation Risk, and for the Direxion Daily Technology Bear 3X Shares, Daily Inverse Index Correlation Risk, and risks related to Shorting and Cash Transactions.  Please see the summary and full prospectuses for a more complete description of these and other risks of each Fund.

Risks of the Fund include Effects of Compounding and Market Volatility Risk, Leverage Risk, Market Risk, Counterparty Risk, Rebalancing Risk, Intra-Day Investment Risk, Daily Index Correlation Risk, Other Investment Companies (including ETFs) Risk, and risks specific to the securities of the Robotics & Artificial Intelligence Companies, and the Industrials and Information Technology Sectors. Robotics and artificial intelligence companies may have limited product lines, markets, financial resources or personnel. These companies typically face intense competition and potentially rapid product obsolescence. Robotics and artificial intelligence companies, especially smaller companies, tend to be more volatile than companies that do not rely heavily on technology.  Please see the summary and full prospectuses for a more complete description of these and other risks of the Fund.

Distributor: Foreside Fund Services, LLC.