Oil was off to a strong start in 2020 following the escalation in Middle East tensions that have threatened oil output in the region. U.S. crude climbed to $65.65 — its highest level since April — while Brent crude jumped to $71.75 per barrel — its highest level since September.
Middle East Tensions
Tensions flared up last week when the U.S. air strike near the Baghdad International Airport killed top Iranian commander Qasem Soleimani. This sparked fears of a widening Middle East conflict that could disrupt oil supplies, which accounts for nearly half of the world’s oil production.
Iran’s president Hassan Rouhani said that the country would no longer abide by any limits on its enrichment of uranium and Iraq’s parliament voted to expel U.S. troops from the country. On the other hand, President Donald Trump threatened to impose sanctions on Iraq, the second-largest producer among the Organization of the Petroleum Exporting Countries (OPEC), if it carried out retaliatory attacks or expelled U.S. troops from the country (read: ETFs to Gain & Lose From Higher Oil Price).
The tensions deepened after Iran launched an attack on U.S.-led forces in Iraq in response to the retaliation. This has amplified concerns about a spiraling tit-for-tat conflict between the United States and Iran.
The fresh OPEC output cut deal led to renewed confidence in the space at the end of last year. Additionally, the Fed’s dovish outlook, which pushed the U.S. dollar down, also supported a spike in oil price. Notably, a weak dollar made dollar-denominated assets cheap for foreign investors, potentially raising demand for commodities. Notably, oil prices have rallied 20% since the beginning of October to their highest level in eight months.
The combination has increased the appeal for oil, fueling a rally in the energy space.
How to Play?
Amid strong optimism, many investors have turned bullish on the energy sector and are seeking to tap this opportunity. For them, a leveraged play on energy or oil could be an excellent idea as these could see huge gains in a very short time frame when compared to the simple products.
Below we have highlighted several leveraged ETFs and the key differences between them (see: all the Leveraged Equity ETFs here):
ProShares Ultra Oil & Gas ETF (DIG - Free Report)
This ETF seeks to deliver twice (2x or 200%) the daily performance of the Dow Jones U.S. Oil & Gas Index. It has been able to manage $74.3 million in its asset base and trades in a good volume of about 125,000 shares per day on average. DIG charges 95 bps in fees per year.
Direxion Daily Energy Bull & 3x Shares (ERX - Free Report)
This fund creates a triple (3x or 300%) leveraged long position in the Energy Select Sector Index while charging 95 bps in fees a year. It is a popular and liquid option in the energy leveraged space with AUM of $305.8 million and average trading volume of around 1.8 million shares (read: Good Tidings Await Oil in 2020: 5 Soaring Energy ETFs).
Direxion Daily S&P Oil & Gas Exploration & Production Bull 3x Shares (GUSH)
This fund offers triple exposure to the daily performance of the S&P Oil & Gas Exploration & Production Select Industry Index. It has accumulated $212.9 million in its asset base and has a solid average daily volume of around 1.5 million shares. Expense ratio comes in at 0.95%.
MicroSectors U.S. Big Oil Index 2X Leveraged ETN (NRGO - Free Report)
This note provides two times levered 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. It has AUM of $53 million and trades in average daily volume of less than 500 shares. Expense ratio comes in at 0.95%.
MicroSectors U.S. Big Oil Index 3X Leveraged ETN (NRGU - Free Report)
This ETN provides three times levered exposure to the Solactive MicroSectors U.S. Big Oil Index. It has been able to manage $51.5 million in its asset base while trades in average daily volume of less than 500 shares. Expense ratio comes in at 0.95%.
ProShares Ultra Bloomberg Crude Oil ETF (UCO - Free Report)
This fund provides a leveraged play to the crude oil segment of the commodities market. It seeks to deliver twice the returns of the daily performance of the Bloomberg WTI Crude Oil Subindex, which consists of futures contracts on crude oil. It has $333.1 million in AUM and trades in heavy volume of about 3.3 million shares a day on average. Expense ratio comes in at 0.95%.
VelocityShares 3x Long Crude Oil ETN (UWT - Free Report)
This targets the energy commodity market through WTI crude oil futures contracts. It seeks to deliver thrice the returns of the S&P GSCI Crude Oil Index Excess Return and has amassed $264.9 million in its asset base. The ETN trades in heavy volumes of around 12.9 million shares a day, though it charges a higher fee of 1.50% per year.
ProShares UltraPro 3x Crude Oil ETF (OILU - Free Report)
This ETF offers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex. The fund has amassed $78.9 million in its asset base and trades in solid average volume of 1.2 million shares. It charges investors 95 bps in annual fees and expenses.
UBS ETRACS ProShares Daily 3x Long Crude ETN (WTIU - Free Report)
With AUM of $13 million, WTIU also delivers three times exposure to the daily performance of the Bloomberg WTI Crude Oil Subindex ER. It has an expense ratio of 1.45% and trades in average daily volume of $80,000 shares (read: 5 Top-Performing Commodity ETFs of 2019).
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.
Still, for ETF investors who are bullish on the energy sector or the commodity oil 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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