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Profit From Higher Oil Price With These Leveraged ETFs
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Oil price has been on a tear to start 2022, with Brent hitting $85 per barrel for the first time in three months and crude oil rising above $83 per barrel. Supply disruptions and unprecedent demand are driving the rally.
Amid rising oil prices, the energy sector looks attractive. Many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy ETFs could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products. These are ProShares Ultra Oil & Gas ETF (DIG - Free Report) , Direxion Daily Energy Bull 2X Shares (ERX - Free Report) , Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report) , MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) and MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report) .
The solid gains came as the escalating unrest in Kazakhstan has accelerated supply concerns. Kazakhstan is currently producing 1.6 million barrels of oil per day. The supply outages in Libya have added to the chaos. Libyan oil output is down more than 500,000 barrels per day due to pipeline maintenance and oilfield shutdowns. Per the National Oil Corp., Libyan oil output is at 729,000 barrels per day, down from a high of more than 1.3 million bpd last year (read: Grab These ETFs to Ride the Latest Rally in Oil Prices).
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, are sticking to their planned output increase by 400,000 barrels per day in February rather than boosting it further. The OPEC+ has been increasing output by the same amount each month since August. Additionally, U.S. inventories have declined for seven straight weeks and are now at the 2018 lows.
On the demand side, increasing COVID-19 vaccination rates, loosening pandemic-related restrictions, and a growing economy have bolstered the demand for energy. The bets that rising coronavirus cases and the spread of the Omicron variant will not derail a global demand recovery has further bolstered investors’ confidence in the sector.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than the near-term contracts. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
Below, we have highlighted the leveraged ETFs in detail:
ProShares Ultra Oil & Gas ETF seeks to deliver twice (2X or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. The index measures the performance of the energy companies including oil drilling equipment and services, coal, oil companies-major, oil companies-secondary, pipelines, liquid, solid or gaseous fossil fuel producers and service companies.
ProShares Ultra Oil & Gas ETF has been able to manage $184.7 million in its asset base and trades in a good volume of about 64,000 shares per day on average. DIG charges 95 bps in fees per year.
Direxion Daily Energy Bull 2X Shares (ERX - Free Report)
Direxion Daily Energy Bull 2X Shares creates two times leveraged position in the Energy Select Sector Index, while charging 95 bps in fees a year.
Direxion Daily Energy Bull 2X Shares is a popular and liquid option in the energy leveraged space with AUM of $563.6 million and an average trading volume of around 3.2 million shares.
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report)
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares has accumulated $840 million in its asset base and the average daily volume is solid at around 1.7 million shares. The ETF charges 95 bps in annual fees (read: 5 Energy ETFs Making the Most of Oil Price Surge).
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report)
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) leveraged 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.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $831.4 million in its asset base while trading in an average daily volume of 293,000 shares. Expense ratio comes in at 0.95%.
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report)
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN is linked to three times leveraged 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 that are active in the exploration and production of oil and gas.
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN has amassed $4.3 million in its asset base and trades in a lower average volume of 15,000 million shares. It charges investors 95 bps in annual fees and expenses.
Bottom Line
As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the energy sector for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.
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Profit From Higher Oil Price With These Leveraged ETFs
Oil price has been on a tear to start 2022, with Brent hitting $85 per barrel for the first time in three months and crude oil rising above $83 per barrel. Supply disruptions and unprecedent demand are driving the rally.
Amid rising oil prices, the energy sector looks attractive. Many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy ETFs could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products. These are ProShares Ultra Oil & Gas ETF (DIG - Free Report) , Direxion Daily Energy Bull 2X Shares (ERX - Free Report) , Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report) , MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report) and MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report) .
The solid gains came as the escalating unrest in Kazakhstan has accelerated supply concerns. Kazakhstan is currently producing 1.6 million barrels of oil per day. The supply outages in Libya have added to the chaos. Libyan oil output is down more than 500,000 barrels per day due to pipeline maintenance and oilfield shutdowns. Per the National Oil Corp., Libyan oil output is at 729,000 barrels per day, down from a high of more than 1.3 million bpd last year (read: Grab These ETFs to Ride the Latest Rally in Oil Prices).
Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, are sticking to their planned output increase by 400,000 barrels per day in February rather than boosting it further. The OPEC+ has been increasing output by the same amount each month since August. Additionally, U.S. inventories have declined for seven straight weeks and are now at the 2018 lows.
On the demand side, increasing COVID-19 vaccination rates, loosening pandemic-related restrictions, and a growing economy have bolstered the demand for energy. The bets that rising coronavirus cases and the spread of the Omicron variant will not derail a global demand recovery has further bolstered investors’ confidence in the sector.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than the near-term contracts. This signals that the oil market is tightening and demand is robust, paving the way for an oil rally. This trend is likely to persist at least in the near term, acting as the biggest catalyst for the commodity.
Below, we have highlighted the leveraged ETFs in detail:
ProShares Ultra Oil & Gas ETF (DIG - Free Report)
ProShares Ultra Oil & Gas ETF seeks to deliver twice (2X or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. The index measures the performance of the energy companies including oil drilling equipment and services, coal, oil companies-major, oil companies-secondary, pipelines, liquid, solid or gaseous fossil fuel producers and service companies.
ProShares Ultra Oil & Gas ETF has been able to manage $184.7 million in its asset base and trades in a good volume of about 64,000 shares per day on average. DIG charges 95 bps in fees per year.
Direxion Daily Energy Bull 2X Shares (ERX - Free Report)
Direxion Daily Energy Bull 2X Shares creates two times leveraged position in the Energy Select Sector Index, while charging 95 bps in fees a year.
Direxion Daily Energy Bull 2X Shares is a popular and liquid option in the energy leveraged space with AUM of $563.6 million and an average trading volume of around 3.2 million shares.
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares (GUSH - Free Report)
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares offers two times exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index.
Direxion Daily S&P Oil & Gas Exploration & Production Bull 2X Shares has accumulated $840 million in its asset base and the average daily volume is solid at around 1.7 million shares. The ETF charges 95 bps in annual fees (read: 5 Energy ETFs Making the Most of Oil Price Surge).
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report)
MicroSectors U.S. Big Oil Index 3X Leveraged ETN provides three times (3X or 300%) leveraged 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.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN has been able to manage $831.4 million in its asset base while trading in an average daily volume of 293,000 shares. Expense ratio comes in at 0.95%.
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN (OILU - Free Report)
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN is linked to three times leveraged 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 that are active in the exploration and production of oil and gas.
MicroSectors Oil & Gas Exploration & Production 3X Leveraged ETN has amassed $4.3 million in its asset base and trades in a lower average volume of 15,000 million shares. It charges investors 95 bps in annual fees and expenses.
Bottom Line
As a caveat, investors should note that these products are extremely volatile and suitable only for short-term traders. Additionally, the daily rebalancing — when combined with leverage — may make these products deviate significantly from the expected long-term performance figures (see: all the Leveraged Equity ETFs here).
Still, for ETF investors who are bullish on the energy sector for the near term, either of the above products can be an interesting choice. Clearly, a near-term long could be intriguing for those with high-risk tolerance and a belief that the trend is the friend in this corner of the investing world.