This article was originally published on ETFTrends.com.
A chip shortage is just what bullish semiconductor traders need. Now, ETFs like the Direxion Daily Semiconductor Bull 3X ETF (SOXL) could get additional tailwinds thanks to Joe Biden.
"The White House has pledged to help address the ongoing global semiconductor shortage, with President Joe Biden said to be signing an executive order to conduct a supply chain review along with developing a long-term strategy to avoid future shortages, via Bloomberg," a The Verge article said.
For traders seeking a leveraged trade, SOXL seeks daily investment results, before fees and expenses, of 300% of the daily performance of the PHLX Semiconductor Sector Index. The fund, under normal circumstances, invests at least 80% of its net assets in financial instruments, such as swap agreements, and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index.
The index measures the performance of domestic companies engaged in the design, distribution, manufacture, and sale of semiconductors. Momentum is obviously on the side of semiconductors, with SOXL up almost 120%.
Less Chips, More Bulls
The basic economic tenet of supply and demand is certainly playing into the bull's hands. With an increased reliance on technology amid the pandemic, more processing power is necessary.
"The cause of the current shortage is due to a mixture of factors: spikes in demand for consumer electronic products like laptops due to changes in lifestyle caused by the COVID-19 pandemic; slowdowns in chip production also caused by the pandemic; a business model in the semiconductor industry that sees most companies outsource chip production to firms like Taiwan Semiconductor Manufacturing Company (TSMC) instead of building the parts themselves; and lingering effects from former President Donald Trump’s trade war with China that made it harder for US companies to work with Chinese chip producers," the Verge article explained.
It's not just consumer electronics that are affected by a chip shortage. Per the article, "a shortage of semiconductor chips impacts not only traditional technology industries, but also a wide-ranging list of other industries," such as the automotive sector.
The momentum in the semiconductor industry is apparent in SOXL's holdings the past six months. Intel, Broadcom, Texas Instruments, NVIDIA, and Qualcomm have all played into strength for the fund.
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