Why Direxion Daily Semiconductor Bull 3X ETF Dropped Today
Key Points
The Trump Administration may permit Apple to buy memory chips from China.
U.S. semiconductor stocks are sagging on the potential for price competition from China.
Micron, a memory stock that competes with China, is the No. 1 biggest holding of the SOXL ETF.
The Direxion Daily Semiconductor Bull 3X Shares ETF (NYSEMKT: SOXL) is a momentum back -- but its momentum is moving in the wrong direction today.
This ETF, which takes the performance of semiconductor stocks as a whole and multiplies it -- up or down -- by 3x, soared 32% in the first two weeks of August, but then turned tail today and dropped 8% through 12:12 p.m. ET.
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And why?
Image source: Getty Images.
China challenges Micron and Sandisk
Because China, that's why.
As tech website WCCTech reports, the Trump Administration will permit Apple to purchase memory chips from Chinese suppliers ChangXin Memory Technologies (CXMT) and Yangtze Memory Technologies Corp (YMTC). CXMT makes DRAM memory and is working to produce stacked DRAM, known as high-bandwidth memory (HBM), for use in artificial intelligence. YMTC produces NAND flash memory -- also used in AI.
This decision poses a direct threat to two of America's biggest memory chip companies, Sandisk, which manufactures NAND flash memory, and Micron, which manufactures both NAND and DRAM. Adding injury to insult, CXMT recently raised billions in new cash to compete with Micron -- and YMTC will soon follow suit.
What this means for the Direxion Daily Semiconductor Bull 3X Shares ETF
The threat to Micron is most relevant to investors in the Direxion Daily Semiconductor Bull 3X Shares ETF, because Micron is the SOXL ETF's biggest holding -- 8.6%.
Now, the good news is that Micron stock is only down about 5% today, and less than Sandisk (about 6%). The bad news is that other SOXL holdings such as AMD and Nvidia -- SOXL's Nos. 2 and 3 biggest -- are also in the red.
That's the risk you get investing in heavily leveraged tech ETFs like SOXL. When semiconductor stocks are hot, SOXL is even hotter. But when the semis cool down, SOXL goes ice-cold.
Like today.
Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Advanced Micro Devices, Apple, Micron Technology, and Nvidia. The Motley Fool has a disclosure policy.