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Here's How to Play Rising Energy Sector With Leveraged ETFs
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The energy sector has been the outperformer this year driven by higher oil prices, which have been on fire since Russia attacked Ukraine. Global oil price Brent neared $120 per barrel — its highest level since March 2012 — while U.S. crude topped $115 per barrel - its highest since 2008. In fact, Brent has gained $20 per barrel in just a week (read: Sector ETFs to Benefit/Lose as Oil May Hit $120 Soon).
Oil price is expected to increase further as Russia is the second biggest exporter of crude oil after Saudi Arabia. Any political or economic turmoil in Russia will disrupt the oil supply in the already tight energy market. Given this, bullish investors should bet on leveraged ETFs to make quick profits as these could see huge gains in a very short time frame when compared to 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) .
Solid Trends
The latest rally came on the back of severe sanctions by Western countries against Russia over Ukraine that has disrupted trade flows. Sanctions by the United States and other countries will force Russia to supply less crude or natural gas that would have substantial implications on oil prices and the global economy. Russia accounts for one in every 10 barrels of oil consumed globally.
In fact, a fresh round of U.S. sanctions could target Russia's oil refining sector, raising concerns over Russian oil and gas exports.
Additionally, U.S. crude stockpiles at multi-year lows added to the strength. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, decided to maintain an increase in output of 400,000 barrels per day March despite surging prices.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than 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 (read: Oil in Backwardation: 7 ETFs That Topped the Chart Last Week).
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 $241.4 million in its asset base and trades in a good volume of about 68,000 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 $719.9 million and an average trading volume of around 6 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 $869.8 million in its asset base and the average daily volume is solid at around 2 million shares. The ETF charges 95 bps in annual fees (read: 5 Leveraged ETFs Up More Than 20% in February).
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 $1.2 billion in its asset base while trading in an average daily volume of 291,000 shares. Its expense ratio is 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 $12.3 million in its asset base and trades in a lower average volume of 49,000 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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Here's How to Play Rising Energy Sector With Leveraged ETFs
The energy sector has been the outperformer this year driven by higher oil prices, which have been on fire since Russia attacked Ukraine. Global oil price Brent neared $120 per barrel — its highest level since March 2012 — while U.S. crude topped $115 per barrel - its highest since 2008. In fact, Brent has gained $20 per barrel in just a week (read: Sector ETFs to Benefit/Lose as Oil May Hit $120 Soon).
Oil price is expected to increase further as Russia is the second biggest exporter of crude oil after Saudi Arabia. Any political or economic turmoil in Russia will disrupt the oil supply in the already tight energy market. Given this, bullish investors should bet on leveraged ETFs to make quick profits as these could see huge gains in a very short time frame when compared to 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) .
Solid Trends
The latest rally came on the back of severe sanctions by Western countries against Russia over Ukraine that has disrupted trade flows. Sanctions by the United States and other countries will force Russia to supply less crude or natural gas that would have substantial implications on oil prices and the global economy. Russia accounts for one in every 10 barrels of oil consumed globally.
In fact, a fresh round of U.S. sanctions could target Russia's oil refining sector, raising concerns over Russian oil and gas exports.
Additionally, U.S. crude stockpiles at multi-year lows added to the strength. The Organization of the Petroleum Exporting Countries (OPEC) and its allies, known as OPEC+, decided to maintain an increase in output of 400,000 barrels per day March despite surging prices.
Added to the strong momentum is the state of backwardation in the oil futures market, where later-dated contracts are cheaper than 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 (read: Oil in Backwardation: 7 ETFs That Topped the Chart Last Week).
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 $241.4 million in its asset base and trades in a good volume of about 68,000 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 $719.9 million and an average trading volume of around 6 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 $869.8 million in its asset base and the average daily volume is solid at around 2 million shares. The ETF charges 95 bps in annual fees (read: 5 Leveraged ETFs Up More Than 20% in February).
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 $1.2 billion in its asset base while trading in an average daily volume of 291,000 shares. Its expense ratio is 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 $12.3 million in its asset base and trades in a lower average volume of 49,000 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.