How investors might be overdoing their bets on semiconductor stocks

MW How investors might be overdoing their bets on semiconductor stocks

By Philip van Doorn

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April was a very good month for U.S. stocks, and an even better one for the semiconductor industry. But leveraged bets on an industry group can cause gains to evaporate.

You might be old enough to remember when, in December 1996, former Federal Reserve Chairman Alan Greenspan used the term "irrational exuberance" to underscore how important it was for the central bank to take asset valuations into account when setting policy.

Greenspan didn't say that the stock market had become overvalued at that time. But those words might apply to a particular trade some investors have made during the run-up of stock prices for semiconductor manufacturers.

In the Need to Know column this week, Barbara Kollmeyer discussed how analysts at Goldman Sachs, led by Gail Hafif, had noted an increasing number of investors were "trading the mania" by taking leveraged bets on the direction of chip makers' stocks. They did this by pouring money into the Direxion Daily Semiconductor Bull 3X ETF SOXL and the Direxion Daily Semiconductor Bear 3X ETF SOXS.

The Goldman analysts warned in a client note that this action could lead to "more violent thematic moves under the hood."

On its page describing these two exchange-traded funds, Direxion makes clear that they are designed to "seek daily investment results" that are 300%, or the inverse for the Bear fund, of the performance of the NYSE Semiconductor Index, which itself is tracked by the iShares Semiconductor ETF SOXX.

Direxion warns (and the italics and bold text are theirs):

"These leveraged ETFs seek a return that is 300% or -300% of the return of their benchmark index for a single day. The funds should not be expected to provide three times or negative three times the return of the benchmark's cumulative return for periods greater than a day.

In other words, these funds are designed for use by traders looking to balance their exposures intraday. The leveraged trades the ETFs' managers use to pursue the 300% or -300% daily returns against the underlying index are closed out at the end of each trading day. Holding one of these ETFs for a long period could backfire, although it has worked out well recently. Through April, the Direxion Daily Semiconductor Bull 3X ETF had returned 202.1% for 2026, while SOXX had returned 53.3%, with dividends reinvested.

Two charts illustrate the opportunity and danger for investors who use leveraged ETFs as longer-term holdings. First, here is a three-year chart comparing the total return of SOXL and SOXX:

This three-year chart through April 30, 2026, shows the Direxion Daily Semiconductor Bull 3X ETF $(SOXL)$ has greatly outperformed the iShares Semiconductor ETF $(SOXX)$, with nearly all of that gain resulting from action over the past few daily trading sessions.

And now, five years:

A five-year chart through April 30, 2026, shows SOXL outperforming SOXX by a narrow margin for the full period.

Both charts are dominated by action over the past few days, while the five-year chart shows that an investor would have had a very rough ride for most of the five years.

You have been warned. The leveraged bets are for daily use. For an investor who remains enthusiastic about the semiconductor space, SOXX is a far safer play.

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Friday's NTK: Software stocks are finally priced for a comeback, this veteran strategist says. He's buying.

Semiconductor stocks and the 'critical question'

The S&P 500 SPX rose 10.4% in April - its best one-month performance since November 2020. And as mentioned above, the iShares Semiconductor ETF soared 53.3% for the month.

For investors wondering whether or not to begin selling semiconductor stocks, this article looks at how stock valuations compare with those during the dot-com bubble, stretched trading patterns and the long-term case for chip makers.

The April action:

-- Stocks clock their best month since 2020 as Wall Street shakes off Iran oil shock

-- These stocks were the biggest winners among the S&P 500 for the month

For traders: S&P 500 pushes to new highs. Here is the 'line in the sand' for this bull run.

How high might oil prices go?

Continuous front-month contracts for West Texas Crude Oil (CL00) were trading for $102.86 a barrel early Friday on the New York Mercantile Exchange, up from $57.42 at the end of 2025. Brent crude (BRN00) was trading higher, as usual, at $110.92 a barrel. Headlines about Iran, President Donald Trump and the Strait of Hormuz will push prices higher or lower day to day, underscoring how investors shouldn't jump to conclusions.

This week provided an example, with the United Arab Emirates saying they were leaving OPEC, thus freeing the country to increase oil exports without seeking agreement among cartel members. Then again, the U.A.E. may need to be careful how much it expands production, as Myra P. Saefong explained.

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More coverage: The U.S. produces the most oil in the world. So why are gasoline prices so high?

Tech stocks

This was quite a week for Big Tech earnings reports, with Alphabet $(GOOG)$ among companies striking a chord with investors - the stock rose 10% on Thursday after the company reported a 63% increase in first-quarter revenue for its Google Cloud segment from the year-earlier quarter, with total revenue increasing 22%.

More coverage from the MarketWatch Technology team:

-- The S&P 500's newest member is this under-the-radar software stock

-- Nvidia is confronting a new challenge, even as AI spending keeps increasing

-- SpaceX may face an easier path to S&P 500 entry if these newly proposed rules take hold

-- The memory trade is faltering as Western Digital's stock slides in the face of earnings beat

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Every month, Mike Murphy surveys the offerings of eight streaming services to narrow down the list of what to watch, but also which ones to pay for. Since you are not locked into contracts with the streamers, you are free to weave among them month-to-month. Mike calls this "strategic churning" and believes that this month is "a good time to trim your viewing habits - along with your streaming spending."

Here's what to stream during May, and which streaming services to avoid paying for.

Are you buying a house? Your property tax estimate is probably incorrect.

Andrew Keshner explains how home buyers might be in for painful surprises. Here is what you can do to understand and limit property taxes on your new home.

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Thoughts about the start of a career

Don't Short Yourself - MarketWatch's new weekly newsletter - offers smart tips to help you earn and grow your money.

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Managing your retirement accounts

Beth Pinsker writes the Fix My Portfolio column. This week, she detailed how retired people can balance their spending to keep their nest eggs growing.

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How investors might be overdoing their bets on semiconductor stocks

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