Picture a fund that aims for three times the chip index's move, every single day. For most of this year that was a joy ride up. On Thursday, Nov. 5 the chip index fell 12.25%. The Direxion Daily Semiconductor Bull 3X ETF (SOXL) fell 39%. One day took back more than a third of every dollar in it.
The fund isn't broken. It did what its label says. It seeks 300% of the daily performance of the NYSE Semiconductor Index. That's a different index from the better-known PHLX one that fell 12.25%, so the two numbers don't line up exactly. The Journal's David Uberti, Jack Pitcher and Hannah Erin Lang note that traders in triple-leveraged funds got three times the ride up earlier this year. On the way down, the same math runs in reverse.
Here's the catch in plain words. The fund resets every night. It aims for three times each single day's move, and the days don't add up the way you'd hope. Say an index falls 10% and then rises 10%. A plain fund is down 1%. A triple fund loses 30%, then gains 30% on what's left. It's down 9%. Do that for months and the fund drifts away from the index, usually downward, even when the index ends flat. That's why the word Daily is in its name.
Who was selling
Late in the afternoon, individual investors were on pace for their biggest day of net stock selling since Covid, according to Vanda Analytics. Mechanical selling made it worse, said Ben Emons, founder of FedWatch Advisors. Options traders covering their positions helped set off the early slide. As losses grew, computer-driven hedge funds piled in. Then borrowed money unwound. Mike Bell of RBC BlueBay Asset Management told the Journal that “sometimes people sell because markets are going down.” The mirror fund, Direxion's Semiconductor Bear 3X (SOXS), rose 39.22% the same day. Somebody was on the other side of that trade. It wasn't the person who bought the bull fund for the long haul.
Our read
Investments/Risk · IN04, and Behavioral. We don't hold this fund in any of our model books, and we wouldn't. A leveraged fund is a tool for someone making a one-day bet with money they can lose. As a holding, the daily reset works against you, and a day like Thursday can take a third of it between the opening bell and the close. The second lesson is the Vanda line. Selling on the worst day locks in the worst price. Whoever sold Thursday afternoon turned a bad day on paper into a real loss.
Your check this week is the holdings list in your brokerage app, and the fun-money account if you or your teenager has one. Look for anything with 2X, 3X, Ultra, Bull or Bear in the name. If one has been sitting there for months as a long-term holding, that's a one-day tool left running. Decide what it's for, and how much you'd accept losing in a single day, before the next day like Thursday. If you're not sure what a fund in your account is built to do, that's a good question for a review.