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These Are The Leveraged ETFs At Play When Trade War Worries Strike

Direxion

The U.S.-China trade war is more than 18 months old. And in that time the conflict has taken a toll on stocks across the world and put company executives and market watchers alike on edge.

Traders just weathered another bout of tariff-related volatility in the wake of President Trump’s latest round of tariffs. The announcement from the most recent escalation managed not only to sack the S&P 500 by more than -6.5%, but caused a mad dash to bonds and treasury notes that resulted in another inversion of the 2-year/10-year Treasury yields curve, further exacerbating the equity sell-off.

Nevertheless, the equity market has bounced back; as it did following the March 2018 sell-off as the first round of tariffs were introduced; as it did following the September 2018 sell-off in response to a second round of tariffs; as it did following the May 2019 sell-off as the Trump administration introduced legislation to ban Chinese telecom firm Huawei from doing business in the U.S.; as it has done on numerous rumors of failed negotiations, bad faith accusations and an array of other dead-end truces and false accords.

The point is, the market has been here before, and many of the same industries keep getting knocked down only to get back up again for another go. In the case of such consistent market patterns, traders often turn to leveraged ETFs to capture some of the directionality of these moves.

While there’s no telling if and when a lasting bear market will finally strike the U.S. exchanges as a result of the interminable trade war, the leveraged sector ETFs below are among the most consistently affected by the many bumps along the road to peace.

Semiconductors

Long before the trade war kicked off in earnest, many on Wall Street predicted semiconductors would be hit particularly hard in any trade dispute with China. In 2018, as the trade war was ramping up, China spent more on chip imports than it did on oil and Chinese tech firm Huawei alone purchased more than $11 billion on semiconductor components from American manufacturers.

The fallout from the tariffs is plain to see in many of the largest semi companies. Revenue for GPU industry leader Nvidia Inc. (NASDAQ: NVDA) is down 24% in the first quarter of 2019 compared to this time last year, while sales for competitor Advanced Micro Devices, Inc. (NASDAQ: AMD) is down 17%.

In the 18 months since the China Tariffs were first announced, Direxion Daily Semiconductor Bear 3X Shares (NYSE: SOXS) has spiked by as much as 20% in a single day, and has made double-digit percentage moves as recently as mid-August.

Conversely, the Direxion Daily Semiconductor Bull 3X Shares (NYSE: SOXL) has rebounded three times in that same span to bump up against an all-time high just above the $200 level.

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Charts via Yahoo Finance; Data as of 9/4/19. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.  Current performance may be lower or higher than the performance data quoted. For standardized performance, click here.

Technology

Unsurprisingly, technology names as a whole have been susceptible to the trade spat since the troubles faced by chip makers and component manufacturers like Intel Corporation (NASDAQ: INTC) and QUALCOMM Inc. (NASDAQ: QCOM) impact company all along the supply chain.

But tech traders have also punished mega-cap consumer tech names like Apple Inc. (NASDAQ: AAPL) and, to a lesser extent, Microsoft Corporation (NASDAQ: MSFT) for the damage the trade tariffs are doing to those companies’ sales in the quickly expanding Chinese consumer market. Apples’ China revenue fell by more than $5 billion year-over-year in its first-quarter report, and Chinese sales of the company’s iPhone fell 14% in the most recent quarter, losing most of its market share to phones produced by Huawei.

Although the Direxion Daily Technology Bear 3X Shares (NYSE: TECS) has shown some strong moves since the start of the trade war, moving as much a 15% intraday, it’s really the rush back into tech that has continuously propelled the Direxion Daily Technology Bull 3X Shares (NYSE: TECL) from multi-week lows to new all-time highs.

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Charts via Yahoo Finance; Data as of 9/4/19. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.  Current performance may be lower or higher than the performance data quoted. For standardized performance, click here.

Biotech

Finally, and perhaps most unexpectedly, the biotech sector has been surprisingly vulnerable to breakdowns in negotiations. Although, maybe it’s not so surprising, as China’s ambitions as a global economic leader also extend to pharmaceutical developments. Over the course of 2018, that ambition manifested itself as 7 billion in capital invested in biotech and research firms across the globe to develop new, non-generic prescription medicines.

In fact, pharmaceutical concern Twist Bioscience Corporation (NASDAQ: TWST) recently came under congressional scrutiny for its recent partnership with a Chinese investor that includes setting up operations in the country after previously receiving funding from the U.S. Department of Defense. 

Although the global investment pattern has continued unabated, U.S. companies are seeing less capital due to the trade war. Investment from China to the U.S. has been cut nearly in half in the first six months of 2019 compared to the same span last year.

While it’s difficult to quantify exactly the toll this has taken on domestic biotech stocks, especially given other headwinds in the industry like slowing M&A, the Direxion Daily S&P Biotech Bull 3X Shares (NYSE: LABU) has nonetheless fallen significantly from its all-time high set back in June 2018. Most of the major short-term moves related to the trade war have instead come from the Direxion Daily S&P Biotech Bear 3X Shares (NYSE: LABD), which has seen several intraday moves above 10% in the past month alone and has previously jumped by as much as 15% in a single session over 2018.

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Charts via Yahoo Finance; Data as of 9/4/19. Past performance is not indicative of future results. Investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost.  Current performance may be lower or higher than the performance data quoted. For standardized performance, click here.

An investor should carefully consider a Fund’s investment objective, risks, charges, and expenses before investing. A Fund’s prospectus and summary prospectus contain this and other information about the Direxion Shares. To obtain a Fund’s prospectus and summary prospectus call 866-476-7523 or visit our website at direxion.com. A Fund’s prospectus and summary prospectus should be read carefully before investing.

Shares of the Direxion Shares are bought and sold at market price (not NAV) and are not individually redeemed from a Fund. Market Price returns are based upon the midpoint of the bid/ask spread at 4:00 pm EST (when NAV is normally calculated) and do not represent the returns you would receive if you traded shares at other times. Brokerage commissions will reduce returns. Fund returns assume that dividends and capital gains distributions have been reinvested in the Fund at NAV. Some performance results reflect expense reimbursements or recoupments and fee waivers in effect during certain periods shown. Absent these reimbursements or recoupments and fee waivers, results would have been less favorable.

Direxion Shares Risks - An investment in the ETFs involves risk, including the possible loss of principal. The ETFs are non-diversified and include risks associated with concentration that results from an ETF’s investments in a particular industry or sector which can increase volatility. The use of derivatives such as futures contracts and swaps are subject to market risks that may cause their price to fluctuate over time. The ETFs do not attempt to, and should not be expected to, provide returns which are a multiple of the return of their respective index for periods other than a single day. For other risks including leverage, correlation, daily compounding, market volatility and risks specific to an industry or sector, please read the prospectus.

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