Pity investors in the Direxion Daily Semiconductor Bull 3X Shares ETF (SOXL -14.52%) -- they just can't catch a break.
For three days running, this ETF has fallen 10% or more. (It's actually fallen for four straight days, but Thursday's decline was rather modest.) Counting today's 12.8% decline through 3:10 p.m., the semiconductor index has lost 31% of its value since Wednesday evening.
But why?
Image source: Getty Images.
China is coming
China is one worry.
Booming semiconductor profits have depended heavily on low supply and high prices for artificial intelligence chips in general, and computer memory chips (DRAM and NAND) in particular -- both needed to equip data centers to answer AI questions. This scenario has inflated profit margins for semiconductor companies, including Micron (MU -8.85%), Nvidia (NVDA +0.42%), and Advanced Micro Devices (AMD -8.28%), which reported gross profit margins of 85%, 75%, and 55%, respectively, in their most recent quarters.
Problem is, China is coming after these fat margins. It's ramping production, selling cheap, and recently, begun IPOing companies to raise cash to increase production of cheap semiconductor chips. Apple's (AAPL +1.02%) recent request for permission to buy memory chips from CXMT suggests the demand is there, and customers won't balk at buying Chinese chips if the price is right -- and the supply is there.
Add a dash of market worry that AI companies may slow down spending to conserve cash, and this sets up a nasty scenario for investors.
NYSEMKT: SOXL
Key Data Points
What this means for the Direxion Daily Semiconductor Bull 3X Shares ETF
Now here's why this is bad news for the Direxion Daily Semiconductor Bull 3X Shares ETF in particular: Micron, Nvidia, and AMD are the top 3 holdings of the SOXL. When these stocks go down (as two of them are today), the ETF drops even faster.
