3X Chip ETF SOXL Falls 50% in a Month as Jain Warns on Risk

The Direxion Daily Semiconductor Bull 3X ETF (NYSEARCA:SOXL) fell 48.63% between October 13 and November 12, dropping from $127.57 to $65.53, and slid another 17.69% to $53.94 on Friday morning. The collapse came days after hedge fund manager Bobby Jain issued a blunt warning about the exact risks retail investors had concentrated in the fund.

"Liquidity, concentration, leverage are three things you can't put together," Jain said in a Bloomberg Businessweek interview released Friday, November 13. He is CEO and chief investment officer of Jain Global, a multi-strategy hedge fund he built from scratch after careers at Credit Suisse and Millennium.

What did Jain actually say?

Jain described his firm's new Millennium partnership as a deal in which Jain Global operates as a separate business with a common investor base.

Asked whether hedge fund leverage is a concern, Jain defended the practice. "If you have to use leverage, these firms are the most responsible users," he said. He pointed to strong capital structures and sophisticated prime broker relationships. Looking back over 25 to 30 years, he said, "I don't think you've really felt it," adding that people "learned in '98."

Jain was talking about large hedge funds. He never mentioned retail investors or leveraged ETFs. His comments arrived as retail money poured into a leveraged chip fund.

How much money flowed in?

The inflow figures set records on two timescales.

• U.S. leveraged ETFs took in $9.5 billion in the week ending October 16. That was the largest weekly intake in data going back to 2006, and more than double the previous record.
• Leveraged ETFs collected about $13 billion for all of October, the biggest month in Goldman Sachs (NYSE:GS) data.
• SOXL pulled in $5.1 billion in the week before November 10, its second-largest weekly haul ever, exceeded only by $6.1 billion in the week ending October 16.

"Retail is buying the dip in chip stocks on leverage," The Kobeissi Letter wrote. ETF analyst Eric Balchunas has called SOXL the most popular ETF in South Korea.

How does the fund stack all three risks?

Each element of Jain's rule appears in one ticker.

• Concentration. The fund holds only semiconductor stocks. As of July 31, its largest positions were NVIDIA (NASDAQ:NVDA) at 5.99% of net assets, Advanced Micro Devices (NASDAQ:AMD) at 5.82% and Broadcom (NASDAQ:AVGO) at 5.49%.
• Leverage. It targets three times the chip index's daily move.
• Liquidity. It held $19.44 billion in net assets as of July 31, and money surging in and out at that scale can magnify each swing in a crowded trade.

Why did losses exceed expectations?

SOXL resets its leverage every day. When chip stocks swing back and forth, daily compounding can leave the fund well below three times the index return over weeks or months. Traders call this volatility decay.

The losses came fast. SOXL fell 30.04% from $93.67 on October 16 to the November 12 close. Anyone who bought during the record inflow week is underwater. Hedgeye said on November 10 that the fund was down 81% from its cycle peak.

The ride has run both directions. Even after Friday's drop, SOXL was up 31.98% from its $40.87 close on November 5. It was up 28.42% year to date. Over five years, it was down 12.22%.

Will dip buyers return?

The open question is whether retail keeps adding money after a week like this one. Weekly flow reports will show whether SOXL buyers came back after Friday's drop or started pulling out.

Jain's rule came from a world of prime brokers and risk managers. The coming weeks of chip stock moves will test how well retail investors can live with liquidity risk, concentration and leverage at once, and the next flow print will reveal whether the record dip-buying has run its course.