These 2 ETFs Let You 2X Chip Stocks No Matter Which Direction They Head Next

When trading leveraged sector products, especially those with three times the movement of a market segment that is already volatile, active traders typically focus on the obvious risk of daily leverage decay. Because these products reset their exposure daily, holding them across choppy or sideways markets leads to performance drag versus the underlying ETF, index, or stock.

However, a lesser-understood risk sits inside products like the Direxion Daily Semiconductors Top 5 Bull 2X ETF (TSXU) and the Direxion Daily Semiconductors Top 5 Bear 2X ETF (TSXD). 

While traders assume they are taking a pure directional bet on the semiconductor sector, these ETFs are equal-weighted across the top-five semiconductor stocks, as chosen by the fund. 

That concentration is fine if they all move in sync. But when they diverge in performance, there’s a risk that you thought you were getting something you weren’t. Let’s check out why.

What Are the Top 5 Semiconductor Stocks?

Unlike broad semiconductor benchmark ETFs that hold 30 or more companies weighted by market capitalization, TSXU and TSXD track an index restricted strictly to the top five U.S. semiconductor leaders. Currently the funds target Nvidia (NVDA), Broadcom (AVGO), Advanced Micro Devices (AMD), Taiwan Semiconductor (TSM), and Micron (MU). Here’s what they look like, side by side.

We see that their performance levels have diverged. And that’s fine in a bull market. But lately I’ve been trying to find the best ways to profit from a decline in high-flying, AI-driven stocks. TXSD seems like it would be the ideal route to take. But there’s something that gives me pause.

Are the five stocks equally weighted? NVDA is such a market icon, it is possible that three or four of the others will tank, but the market leader will not follow suit. If that’s the case, I will not get the full force of the 2x bear exposure I seek. Is four out of five so bad? No, but it may mean that TXSD isn’t the best strategy. Each of these five stocks has its own inverse leveraged ETFs. 

There’s also the ongoing earnings season. In a broad semiconductor index, if one major chip designer reports disappointing earnings while the rest of the industry trades sideways, the overall index impact could be muted. That defeats the purpose.

Above, we see the two leveraged ETFs side by side. You’ll note that neither is very big. TSXU has around $12 million in assets, and TXSD less than $2 million. 

Most ETFs are priced (bid/offer spread) based on the liquidity of the underlying holdings. So low turnover is usually not a deterrent to me, since that is really not what matters. It is all about the ability of the ETF manager to buy the basket in seconds, with minimal, if any, price slippage.

But TSXU and TSXD hold total return swap contracts backed by cash and U.S. Treasurys, not the semiconductor stocks themselves. Secondary market liquidity is thin, with low trading volume and wide spreads. 

That means that in addition to the risks mentioned above, there’s trade execution risk. And yet I still would consider trading TSXD. The reason why is one of the most important things I can convey. It has to do with position size. 

If I invest $20,000 in an ETF and it is volatile, I might see 15% of it vanish in a matter of weeks. That’s a $3,000 loss. 

However, with something like TSXD, or TSXU, my position size will be much lower. 

With the 2x leverage, the nature of semiconductor stocks in the AI boom, and the limited liquidity, I might not take an initial position of more than $1,000 to $3,000. Even losing half in a flash would still be much less truly “at risk” versus the more traditional, above example. 

Trading ETFs like these is not for everyone. In fact, it is not for most people. That’s one big reason the volumes and asset levels in these two are so low. They are very specialized. 

And with that last chart above, I see the potential for a long period of drought for semiconductor bears coming to a close soon. If that turns out to be the case, even a risk manager like me can throw caution to the wind, put a very small amount down, and swing for the fences. 

Rob Isbitts is a semi-retired CIO, former fiduciary investment advisor, and Barchart columnist. Check out his other work at ETFYourself.com (featuring the Fresh Charts weekly trading post), and ROAR.PiTrade.com, helping investors to better-manage their own portfolios.