Direxion Daily Semiconductor Bull 3x Shares (NYSEARCA: SOXL) stock is an ETF. SOXL is constructed for a particular purpose - that purpose has determined that construction. It is only by understanding these things, the construction and the purpose, that we can work out whether we should be trading this particular instrument. That point stands about all instruments of course, from something as basic as the difference between a stock and a bond up to flavours of ETF. Direxion here is simply the company that provides the product. Daily means that there is that daily reset - this will be important later. Semiconductor means that the ETF is trying to track the performance of semiconductor companies - the PHLX Semiconductor Index. Bull means that this ETF goes up when those stocks go up. 3X is three times leveraged, so the outcome, the performance, should be that for every $1 rise in that index then this ETF rises $3. It is the daily and leveraged aspects which are the most important in the design of the instrument.
If we want to make a bet that the stock prices of semiconductor manufacturers will rise then this is a great place, a great way, to do it. But that daily and leverage means that it’s a bet. This is not a place to invest for the long term on the outperformance of chip manufacturers.
Direxion Daily Semiconductor Bull 3x Shares Stock price from Google Finance
We’ve talked about SOXL before: “The aim of both ETFs is to track an index of semiconductor companies. One is bear, the other bull, that's self-explanatory. They are also geared - so the performance should be 3 times the movement in the underlying index on any one day. As a function of them being geared they are really not - no, just not - for any long term holding. Their price resets each day, the management costs are high, this is something for intraday trading - possibly overnight if really desired. But these are trading instruments, gambles almost, not investments” This is just something true about leveraged or geared ETFs. The costs of gaining the gearing mean that long term holdings will lose money. Perhaps not absolutely, but certainly as compared to the use of other instruments to gain the same exposure over time.
Sure, we can say that SOXL exists so that people can hedge positions in individual semiconductor stocks. Some will use it to do that too. But the ability to hedge always does depend upon a larger number of speculators.
The point we are making here is that SOXL is to be used to hedge or speculate in the short term. By construction it’s simply not an instrument that works in the long term. So, don’t hold it for the long term.
