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Inverse Energy ETFs Rally as Oil Price Fall to 2022 Lows
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After outperforming this year, the energy sector has been witnessing decline over the past month. This is especially true as oil prices have dropped to the lowest since last December. Brent dropped below $80 per barrel for the second time this year, while West Texas Intermediate oil price is hovering near $74 per barrel, erasing all of this year’s gain.
The bearish sentiments led to a surge in inverse or inverse-leveraged ETFs as these fetched outsized returns on bearish sentiments in a short span. These are MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) , MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN (OILD - Free Report) , Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) , ProShares UltraShort Oil & Gas (DUG - Free Report) , and Direxion Daily Energy Bear 2X Shares ETF (ERY - Free Report) .
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short time, provided the trend prevails.
Oil Price Slumps
The slump came on the back of deteriorating energy market fundamentals. Service-sector activity in China recently hit a six-month low, and European economies have slowed due to the high cost of energy and rising interest rates. Additionally, the protests in top importer China over strict COVID-19 curbs at the end of last month have fuelled demand worries (read: Here's Why MLP ETFs Can Outperform Ahead).
Though the U.S. dollar recently witnessed weakness against a basket of major currencies, bets on higher interest rates will drive the greenback higher. The rounds of economic data, including solid jobs and strong service activity, indicates a stronger economy and drove the expectations for higher interest rates. A stronger greenback makes dollar-denominated oil more expensive for buyers holding other currencies, reducing demand.
Further, a Group of Seven (G7), European Union and Australian proposal of imposition of a $60 per barrel price cap on Russian seaborne oil came into effect on Dec 5. This will also weigh on the oil price.
Below, we have highlighted the leveraged ETFs in detail:
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 1025.4%
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies (read: 5 ETFs That Gained Investors' Love Last Week).
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN has accumulated $150.3 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 1.6 million shares.
MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN is linked to three times inverse performance of the MicroSectors Oil & Gas Exploration & Production Index. The index provides exposure to the large-capitalization companies that are domiciled and listed in the United States and active in the exploration and production of oil and gas.
MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN has amassed $23.8 million in its asset base and trades in a lower average volume of 3.3 million shares. It charges investors 95 bps in annual fees and expenses.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) – Up 17%
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares seeks two times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares has accumulated $105 million in its asset base and trades in solid volume of around 16.6 million shares a day on average. The fund charges 95 bps in annual fees.
ProShares UltraShort Oil & Gas (DUG - Free Report) – Up 7.2%
ProShares UltraShort Oil & Gas seeks two times inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging investors 95 bps in fees.
ProShares UltraShort Oil & Gas has amassed $52.8 million in its asset base and trades in a lower volume of more than 440,000 shares per day on average.
Direxion Daily Energy Bear 2X Shares ETF (ERY - Free Report) – Up 7.1%
Direxion Daily Energy Bear 2X Shares ETF provides two times inverse exposure to the Energy Select Sector Index. It has AUM of $54.1 million and trades in a good volume of 8.7 million shares.
Direxion Daily Energy Bear 2X Shares ETF charges an annual fee of 95 bps.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period compared to a shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).
Still, for ETF investors bearish on the energy sector for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing for those with a high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.
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Inverse Energy ETFs Rally as Oil Price Fall to 2022 Lows
After outperforming this year, the energy sector has been witnessing decline over the past month. This is especially true as oil prices have dropped to the lowest since last December. Brent dropped below $80 per barrel for the second time this year, while West Texas Intermediate oil price is hovering near $74 per barrel, erasing all of this year’s gain.
The bearish sentiments led to a surge in inverse or inverse-leveraged ETFs as these fetched outsized returns on bearish sentiments in a short span. These are MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) , MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN (OILD - Free Report) , Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) , ProShares UltraShort Oil & Gas (DUG - Free Report) , and Direxion Daily Energy Bear 2X Shares ETF (ERY - Free Report) .
Inverse and inverse-leveraged ETFs either create an inverse short position or a leveraged inverse short position in the underlying index through the use of swaps, options, futures contracts and other financial instruments. Due to their compounding effect, investors can enjoy higher returns in a very short time, provided the trend prevails.
Oil Price Slumps
The slump came on the back of deteriorating energy market fundamentals. Service-sector activity in China recently hit a six-month low, and European economies have slowed due to the high cost of energy and rising interest rates. Additionally, the protests in top importer China over strict COVID-19 curbs at the end of last month have fuelled demand worries (read: Here's Why MLP ETFs Can Outperform Ahead).
Though the U.S. dollar recently witnessed weakness against a basket of major currencies, bets on higher interest rates will drive the greenback higher. The rounds of economic data, including solid jobs and strong service activity, indicates a stronger economy and drove the expectations for higher interest rates. A stronger greenback makes dollar-denominated oil more expensive for buyers holding other currencies, reducing demand.
Further, a Group of Seven (G7), European Union and Australian proposal of imposition of a $60 per barrel price cap on Russian seaborne oil came into effect on Dec 5. This will also weigh on the oil price.
Below, we have highlighted the leveraged ETFs in detail:
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report) – Up 1025.4%
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN offers three times inverse exposure to the Solactive MicroSectors U.S. Big Oil Index, which is equal-dollar weighted and provides exposure to the 10 largest U.S. energy and oil companies (read: 5 ETFs That Gained Investors' Love Last Week).
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN has accumulated $150.3 million in its asset base. It charges 95 bps in annual fees and trades in an average daily volume of about 1.6 million shares.
MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN (OILD - Free Report) – 1012.8%
MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN is linked to three times inverse performance of the MicroSectors Oil & Gas Exploration & Production Index. The index provides exposure to the large-capitalization companies that are domiciled and listed in the United States and active in the exploration and production of oil and gas.
MicroSectors Oil & Gas Exp. & Prod. -3x Inverse Leveraged ETN has amassed $23.8 million in its asset base and trades in a lower average volume of 3.3 million shares. It charges investors 95 bps in annual fees and expenses.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares (DRIP - Free Report) – Up 17%
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares seeks two times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 2X Shares has accumulated $105 million in its asset base and trades in solid volume of around 16.6 million shares a day on average. The fund charges 95 bps in annual fees.
ProShares UltraShort Oil & Gas (DUG - Free Report) – Up 7.2%
ProShares UltraShort Oil & Gas seeks two times inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging investors 95 bps in fees.
ProShares UltraShort Oil & Gas has amassed $52.8 million in its asset base and trades in a lower volume of more than 440,000 shares per day on average.
Direxion Daily Energy Bear 2X Shares ETF (ERY - Free Report) – Up 7.1%
Direxion Daily Energy Bear 2X Shares ETF provides two times inverse exposure to the Energy Select Sector Index. It has AUM of $54.1 million and trades in a good volume of 8.7 million shares.
Direxion Daily Energy Bear 2X Shares ETF charges an annual fee of 95 bps.
Bottom Line
While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating or seesawing markets. Further, their performances could vary significantly from the actual performance of their underlying index over a longer period compared to a shorter period (such as weeks or months) due to their compounding effect (see: all the Inverse Equity ETFs here).
Still, for ETF investors bearish on the energy sector for the near term, either of the above products could make an interesting choice. Clearly, these could be intriguing for those with a high-risk tolerance, and a belief that the “trend is the friend” in this specific corner of the investing world.