Tech Fell 15% and a 3x Fund Fell 85%

Tech Fell 15% and a 3x Fund Fell 85%

Through early November, US tech is down about 15% from its high this year, while SOXL, a fund that tracks semiconductors with three times daily leverage, is down roughly 85%. Another leveraged tech fund sits between them at about 55%.

Eighty five is not three times fifteen. A 3x fund resets its exposure back to three times at the close of every trading day, so it tracks daily returns rather than the return over a period. When prices move back and forth, that reset compounds losses. On 23 June this year a semiconductor index fund fell 7.9% and SOXL fell 23.1% in one session. On 1 July the index fell 5.7% and the fund fell 16.4%. Stack enough of those days together and the result drifts a long way from a simple multiple.

The same thing works in reverse. In a one way market the mechanism delivers more than three times. From early January to mid July this year, a semiconductor index fund turned 100 dollars into about 176, while SOXL turned the same 100 into about 350.

So this is not a design flaw. It is a trade: more in a trend, worse in chop. The issuer says plainly in its own prospectus that the product is not suitable for buy and hold investors.

Over 2021 to 2025, SOXL returned about 6.9% a year against roughly 20% for the unleveraged semiconductor fund. The longer the holding period, the more that gap points one way.

Source: Direxion prospectus, fund performance data and market reporting (Image: @Marcomadness2)