Why Direxion Daily Semiconductor Bull 3X ETF Jumped 18% Today

At noon ET, shares of the Direxion Daily Semiconductor Bull 3X ETF (NYSEMKT: SOXL) were up by 18%. As expected, that’s three times the 6% gain seen in the popular iShares Semiconductor ETF (NASDAQ: SOXX), which tracks the returns of the NYSE Semiconductor Index.

The underlying index reflects the 30 largest semiconductor stocks on the American markets, measured by market cap. The four largest holdings are an 8.3% portion of Nvidia (NASDAQ: NVDA), a 7.7% helping of Advanced Micro Devices (NASDAQ: AMD), a 7% serving of Micron Technology (NASDAQ: MU), and a 6.7% slice of Broadcom (NASDAQ: AVGO). When these stocks are having a good day, the 3x leveraged ETF skyrockets.

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Thanks to the Iranian ceasefire, the leading chip stocks are indeed enjoying a nice day today. Nvidia is only up by 2% as of this writing, but AMD and Broadcom jumped more than 4% while Micron soared 7.4% higher.

Easing tensions in the Persian Gulf is especially helpful for this sector. Beyond the costs of oil-powered transportation, chipmakers also require helium gas. One-third of the global helium supply comes from Qatar and must be shipped through the Strait of Hormuz.

This ETF looks good today, but let me remind you that it’s not necessarily a great long-term holding.

Leveraged ETFs outperform their multiplier-free counterparts on a good day, but they also fall faster in challenging times. Their trading methods are also designed for single-day accuracy, not long-term precision. On top of all that, the basic iShares Semiconductor fund carries a 0.34% annual expense ratio but the Direxion Daily leveraged version comes with a 0.75% fee load.

The differences in volatility decay, fee ratios, and operating efficiency may seem small but they can add up over time. The Direxion Daily Semiconductor Bull 3x fund has underperformed the iShares Semiconductor and the S&P 500 (SNPINDEX: ^GSPC) over the last 5 years, for example:

SOXL Total Return Level data by YCharts

Big jumps like the one you saw today might inspire you to load up on leveraged ETFs, but I suggest taking a deep breath and a second look at that idea. In the long haul, you’re probably better off with a non-leveraged version of the same fundamental ETF model.

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Anders Bylund has positions in Micron Technology and Nvidia. The Motley Fool has positions in and recommends Advanced Micro Devices, Micron Technology, Nvidia, and iShares Trust-iShares Semiconductor ETF. The Motley Fool recommends Broadcom. The Motley Fool has a disclosure policy.

Why Direxion Daily Semiconductor Bull 3X ETF Jumped 18% Today was originally published by The Motley Fool