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Reasons To Believe In A Thrilling Semiconductor ETF

Driven by the ongoing data center boom, electric vehicle sales, gaming and other factors, semiconductor stocks are scorching hot this year.

· 10/15/2020 07:40

Driven by the ongoing data center boom, electric vehicle sales, gaming and other factors, semiconductor stocks are scorching hot this year.

What Happened

After a September pullback, chip stocks are rallying anew, highlighting the advantages of the Direxion Daily Semiconductor Bull 3X Shares (NYSE:SOXL). SOXL attempts to deliver triple the daily returns for the PHLX Semiconductor Index.

Underscoring the point that leverage is a great thing when it's working in a trader's favor, SOXL is higher by about 50% off its September lows. What's interesting about chip stocks, which are usually considered growth fare, is that the group was trading at a discount to the S&P 500 a month ago, indicating there's some value to be had here.

Why It's Important

Valuation is a longer-ranging catalyst and SOXL isn't designed to be a long-term instrument, but there are other factors playing to the short-term advantages of the Direxion exchange traded fund.

“Bank of America is bullish on chip stocks in the second half of 2020,” reports Maggie Fitzgerald for CNBC. “The Wall Street firm says a group of semiconductor names have secular tailwinds, including artificial intelligence, 5G, cloud, and gaming. Plus, the chip stocks have strong balance sheets and solid free cash flow generation. Bank of America expects the group — which already has strong year-to-date performances — to continue its run-up.”

There's something to those sentiments because other market observers see memory demand increasing into year, potentially providing another spark for the triple-leveraged SOXL.

“Hyperscalers are expected to resume their data center investment from 4Q20. Smartphone makers are to continue accumulating inventory in 4Q20. And, consumers are giving warm responses to recently announced new tech products, including the PlayStation 5, the Nvidia RTX 30 series, and Intel Tiger Lake,” according to Business Korea.

Nvidia Corporation (NASDAQ:NVDA) and Intel Corporation (NASDAQ:INTC) combine for more than 15% of SOXL's weight.

What's Next

The consumer side of semiconductor demand could propel SOXL into year end with new smartphones and video game consoles coming to market. As just one example, pre-orders for Nvidia’s next-generation graphics card, RTX 3080, are strong.

SOXL is also a name for active traders to remember heading into 2021. After all, the global semiconductor industry was valued at $513 billion and is forecast to grow to $540 billion this year before jumping to nearly $570 billion in 2021. Growth like that is as good of a catalyst as any for SOXL.