SoFi's Next Breakout: The 2X Leveraged Play for Aggressive FinTech Investors
Key Points
The Direxion Daily SoFi Bull 2X ETF is designed to double the daily investment results of SoFi stock.
There’s a lot to like about SoFi right now, and this could be a way for risk-tolerant investors to gain exposure.
Like other leveraged ETFs, there are some big risk factors to keep in mind.
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SoFi Technologies (NASDAQ: SOFI) is one of the most popular stocks in the financial sector right now, and for good reason. The business has been growing rapidly for years, with no signs of slowing down, and long-term investors have been handsomely rewarded. Even after a substantial pullback in recent months, SoFi has delivered a 180% return for investors over the past three years.
Thanks to a new ETF launched by Direxion, investors can now supercharge their exposure to SoFi. The Direxion Daily SoFi Bull 2X ETF (NASDAQ: SOFA) is designed to deliver twice the daily returns of SoFi stock -- so if SoFi gains 5% on a strong day, this ETF should gain 10%.
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As mentioned, there are plenty of good reasons to like SoFi as a long-term investment. Revenue grew 37% year-over-year in the most recent quarter, the bank is now highly profitable with a 17% net margin, and loan originations, new member additions, and general innovation within the business has never been higher. But it's important to know what you're getting into before you invest in a leveraged ETF like the Direxion Daily SoFi Bull 2X ETF.
Things to keep in mind
There are a few things to know before you invest. First, leveraged ETFs tend to have relatively high fees, and this one is no exception. The Direxion Daily SoFi Bull 2X ETF has a net expense ratio of 0.97%, which is certainly higher than the typical ETF charges. In other words, if you invest $10,000, almost $100 per year will be going toward fees.
It's also important to keep in mind that while the ETF can amplify positive returns, the 2X effect works both ways. If SoFi plunges by 10%, for example, this ETF will go down by 20%. If SoFi has a string of bad days, declines in a leveraged ETF can stack up quickly.
Finally, without turning this into a math lesson, I want to emphasize that this ETF targets two times the daily returns of SoFi, not its long-term returns. And the mathematics of daily returns don't favor long-term investors. Think of it this way -- if SoFi falls by 20%, this ETF would drop by 40%. If the stock then gained 25%, it would be back to even. But that wouldn't be the case for the leveraged ETF. Let's say that both the stock and the ETF started with a $20 share price. Here's how this would go:
|
Event |
SoFi Stock |
2X Leveraged ETF |
|---|---|---|
|
Initial Share Price |
$20 |
$20 |
|
After 20% Decline |
$16 |
$12 (40%) |
|
After 25% Increase |
$20 |
$18 (50%) |
Source: Author's own calculations.
The point of this simplified example is that when large drops occur, it can take even larger moves for a daily return leveraged ETF to get back to even. If the stock's performance is incredibly strong, a leveraged ETF could certainly work out favorably. But be sure to keep the downsides in mind.
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Matt Frankel, CFP has positions in SoFi Technologies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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