Direxion SOXL Semiconductor ETF: Too Many Questions

Investment Thesis

The Direxion Daily Semiconductor 3x Bull Shares ETF (NYSEARCA:SOXL) is a triple leveraged ETF designed to return 3x the underlying semiconductor index. After a recent article on TQQQ, the triple leveraged QQQ fund, several commenters mentioned SOXL as a comparison. In my opinion, there are too many questions with the macroeconomic and market environments to justify taking a long position. I will break down the weights of the largest components of the ETF and briefly discuss several individual companies. Risk tolerant investors could take a flier on SOXL, but I am not interested in buying today.

The ETF

I’ll be the first to admit that it’s hard to buy anything when the market is puking everything up like it did today (it’s Friday as I write this). It’s even harder to have the stomach to buy a leveraged ETF like SOXL. It was down nearly 7% today and is down 66% YTD. To be perfectly clear, an ETF like this is not something that you make a core position in any portfolio. However, if you look below at the total returns since inception, SOXL has averaged over 40% returns per year.

This turned a $10k investment into nearly $500k since 2011, or approximately 5 times as much money as a $10k investment in SOXX. The semiconductor index was no slouch either, returning over 20% CAGR. The problem for me is that the next couple of years are setting up to be problematic for many sectors, not just semiconductors. Supply chain issues, high valuations, rising interest rates, and the cyclical nature of the semiconductor industry make me question if SOXL will have a repeat performance for investors over the next decade.

As you can see, the index is pretty concentrated, with approximately 57% of the fund in the top 10 holdings. I will break down the four biggest components, which make up 30% of the fund.

NVIDIA

I wrote a piece about NVIDIA (NVDA) with my TQQQ article as it is one of the larger holdings of that ETF as well. NVIDIA is widely regarded as the well-oiled machine of the semiconductor industry. I owned the stock for a couple years and sold late in 2021 and it has remained on my watchlist since. The valuation got too rich for a while, but the correction since November highs in the $330 range is starting to bring the stock closer to fair value. The 40% selloff doesn’t mean that shares are cheap yet, with a 43x earnings multiple and a market cap of $556B. I think we could continue to see shares fall, especially if the broader market stays volatile.

Broadcom

Broadcom (AVGO) is more attractive today than the rest of the main components in the SOXL because of its valuation and its dividend. The company has a 2.8% yield and an earnings multiple of 18.7x. When you look at the company’s history of earnings and dividend growth, the valuation today isn’t too rich, but I don’t think it’s cheap either. Shares are a little more than 10% off of highs, but Broadcom is one of the pieces of the index that is relatively attractive today.

AMD

AMD (AMD) is another name that has sold off significantly from highs above $160. With shares just under $90, the valuation is starting to come back to earth, with an earnings multiple just over 28x. AMD has proven in recent years that it is a better run company than its larger competitor Intel, but the valuation still leaves room for further downside. With a market cap of $157B, it’s not going to grow as fast as it has over the last 5 years. Many contributors are bullish on the company, but I wouldn’t be buying at these levels.

Intel

Intel (INTC) is the value play of the semiconductor sector, but some might call it a value trap. Shares trade at a single digit earnings multiple with a 3.1% dividend. They are repurchasing fewer shares than previous years and are planning to build fabs here in the US. Intel also announced a recent acquisition of Tower Semiconductor (TSEM) and there is a lot going on with the business. However, investors have watched Intel miss opportunity after opportunity over the last two decades. The competition caught up and many consider NVIDIA and AMD to be better run businesses, even if the stocks are more expensive. I have mixed feelings on the company, but I would be more likely to buy shares of Intel than NVIDIA or AMD today purely due to the valuation.

Conclusion

The semiconductor industry has had an impressive run over the last decade. Several companies grew into mature companies able to compete with the incumbent giant Intel, but the industry has always been cyclical in nature. Broadcom could be worth a closer look, but I don’t find the other large components all that attractive today. Investors willing to start a position in SOXL also have to answer several other questions for themselves.

Are the companies in the underlying index attractively valued? Will the supply chain issues linger and have an impact on the industry? Is the market going to have significant issues with interest rates that are supposedly set to rise? All these things would have to line up for me to start a long position in SOXL, but right now there are just too many questions to answer. The returns over the past decade have been impressive, but SOXL ends up in the “too hard” pile for me in 2022.