Market Overview

Leveraged Chip ETFs Embody Trade War Volatility

Leveraged Chip ETFs Embody Trade War Volatility

Huawei, the Chinese telecommunications gear maker, is one of the most identifiable companies caught in the crosshairs of the ongoing US/China trade flap. Swirling controversy around Huawei is pressuring the semiconductor industry and the related exchange traded funds, leading to an avalanche of activity in the Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL) and the Direxion Daily Semiconductor Bear 3X Shares (NYSE: SOXS).

What Happened

The bullish SOXL tries to deliver triple the daily returns of the PHLX Semiconductor Sector Index (XSOX) while the bearish SOXS attempts to replicate triple the daily inverse performance of that widely followed gauge of chip stocks.

Last week, the Commerce Department blacklisted Huwaei, essentially barring the company from buying chips from U.S. semiconductor makers. Broadcom Inc. (NASDAQ: AVGO), Intel Corp. (NASDAQ: INTC), Qualcomm Inc. (NASDAQ: QCOM) and Xilinx Corp. (NASDAQ: XLNX), all top 10 holdings in the index SOXL and SOXS track, are among US-based companies that previously supplied chips to Huwaei.

With that in mind, it is not surprising that the PHLX Semiconductor Sector Index is off 16.48 percent month-to-date.

Why It's Important

“Let’s be clear – we are talking tens of billions of dollars impact,” C.J. Muse, senior equity research analyst at Evercore, said in a recent note. “Loss of this business would slow down investments by U.S. chipmakers, thereby reducing the competitiveness of the U.S. semiconductor industry – and that is a national security issue that the U.S. government needs to consider as well.”

Not surprisingly, activity has recently been elevated in the leveraged SOXL and SOXS. For the five days ending Thursday, May 22, volume in the bullish SOXL was nearly 30 percent above the trailing 20-day average, good for the fifth-largest volume spike over that period among Direxion's leveraged funds, according to issuer data.

What's Next

The aforementioned U.S. chipmakers and along with Google parent Alphabet Inc. (NASDAQ: GOOGL) have suspended activity with Huwaei, but some traders are expecting the bullish SOXL to rebound.

For the 10 days ending May 22, traders plunked down nearly $114.5 million on the bullish SOXL while pulling $33.86 million from the bearish SOXS, according to Direxion data. Over those 10 days, SOXL was by far the top asset gatherer among the issuer's leveraged ETFs while SOXS was the worst offender in terms of assets lost.

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