Key Highlights

● The Philadelphia Semiconductor Index had its biggest one-day drop since June 23.

● Triple-leveraged funds aim to deliver three times the daily return of their index.

● The index closed just above its 200-day moving average of about 10,677.

● The Dow Jones Industrial Average edged up 11.89 points to 52,867.98.

Investors in leveraged semiconductor exchange-traded funds had a painful Thursday, October 22. The Philadelphia Semiconductor Index suffered its biggest one-day drop since June 23, and funds designed to deliver a multiple of that move magnified the damage.

The best-known of them, the Direxion Daily Semiconductor Bull 3X Shares (SOXL), aims to return three times the daily performance of a semiconductor index. A market report said SOXL suffered a brutal wipeout, linking the slide to Nvidia's warning on AI capital and to oil prices above $111.

How leveraged funds work

Leveraged ETFs use derivatives such as swaps to multiply the daily return of an underlying index. A triple-leveraged fund is designed to rise roughly three times as much as its index on a good day and fall about three times as much on a bad one.

The key word is daily. These funds reset their exposure every session, so over longer periods their returns can drift from three times the index's performance, especially in choppy markets. Fund sponsors generally describe them as short-term trading tools rather than long-term holdings.

Inverse funds work the other way. The Direxion Daily Semiconductor Bear 3X Shares (SOXS) is built to move about three times opposite to the index on a given day, so it was designed to benefit from a session like Thursday's.

What sank the chip sector

The selloff had several sources. Lam Research (NASDAQ:LRCX) reported record revenue of $8.22 billion after Wednesday's close but warned that supply-chain constraints would persist into 2027, and its December-quarter outlook had a midpoint slightly below what many investors hoped for. Lam plunged to about $230, while Applied Materials (NASDAQ:AMAT), KLA (NASDAQ:KLAC), ASML (NASDAQ:ASML) and Teradyne (NASDAQ:TER) tumbled.

Nvidia (NASDAQ:NVDA) slid to $212.21 after CEO Jensen Huang said that "the demand of the capital is much greater than the availability of the capital." Bank traders said Huang's remarks spooked markets. Advanced Micro Devices (NASDAQ:AMD), Intel (NASDAQ:INTC), Marvell Technology (NASDAQ:MRVL) and SanDisk (NASDAQ:SNDK) fell sharply, and Micron Technology (NASDAQ:MU) dropped below $900.

Meta Platforms (NASDAQ:META) set the tone with plans for 2026 capital spending of $135 billion to $145 billion and negative free cash flow, raising doubts about the financing of the AI build-out.

A hard reversal after a big run

The drop came after a powerful run. The Philadelphia Semiconductor Index remains sharply higher for the year, though it sits well below its June 22 record. It closed just above its 200-day moving average of about 10,677.

That combination of a big run-up and a sudden reversal is where leveraged funds can be especially punishing. "The dominant market dynamic in recent weeks has been the unwinding of AI-related positions by hedge funds," one bank strategist said.

Other AI-linked funds suffered too. The iShares AI Innovation ETF fell sharply.

Broader market was calmer

The wider market fared far better. About two of every three S&P 500 stocks rose, according to market reports, as investors rotated into consumer staples, health care and homebuilders. The Dow Jones Industrial Average edged up 11.89 points to 52,867.98. The VIX volatility index jumped 2.35 points to 19.03.

Next Tests for Leveraged Chip Funds

Leveraged chip funds will remain highly sensitive to the sector's next moves. Teradyne reports on October 27, and Microsoft (NASDAQ:MSFT) and Alphabet (NASDAQ:GOOGL), major buyers of AI chips, report on October 28, the day of the Federal Reserve's decision. Intel and Amazon (NASDAQ:AMZN) follow on October 29. Traders will also watch whether the semiconductor index holds above its 200-day average, a level many chart watchers view as key support.