Though the coronavirus outbreak has shaken each and every corner of the broader stock market, energy sector has been the worst hit. This is especially true, as the ultra-popular Energy Select Sector SPDR (XLE - Free Report) tumbled 53.3% over the past month compared with a decline of 28.6% for the broad market fund (SPY - Free Report) .
The steep decline came on oil price collapse, thanks to shrinking demand and excess supply. The pandemic has resulted in a slowdown in worldwide travel and business activity that is weighing heavily on oil demand. On the other hand, the collapse of the OPEC and its allies deal to curb production is expected to bring in a wave of supply starting Apr 1. The two powerhouse producers — Saudi Arabia and Russia — are preparing to ramp up production (read: Global Oil Price War Begins: ETFs in Focus).
A number of analysts have warned about falling oil demand. Goldman said lockdowns to counter the coronavirus pandemic have raised the prospect of the steepest ever annual fall in oil demand. It forecasts oil demand to fall as much as 8-9 million barrels per day by the end of March and 1.1 million barrels per day in 2020. Rystad Energy is even more pessimistic, estimating a demand plunge of 2.8 million barrels per day in 2020 and 11 million barrels per day in April.
Notably, oil price has tumbled about 60% so far this year to the lowest since 2003 and is poised to decline further. Growing oil supply could end up filling all storage tanks worldwide, potentially causing prices to drop even further. Additionally, the oil market could face one of the largest supply overhangs in modern oil market history in April. All this indicates that the worst might not be over yet.
Some analysts believe oil prices could slide as low as $10 per barrel while one analyst at Wall Street says oil price could reach possibly zero.
How to Play?
Amid sluggish fundamentals, many investors have turned bearish on the energy sector and are seeking to tap this opportunity. For them, an inverse or leveraged inverse 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:
MicroSectors U.S. Big Oil Index Inverse ETN (YGRN - Free Report)
This is an ETN option providing inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. It has accumulated $104.6 million in its asset base since its inception in April 2019 and trades in a paltry daily volume of under 1,000 shares. The product charges 95 bps in fees per year from investors and climbed 99.2% in a month (read: Oil & ETFs: What Investors Need to Know).
MicroSectors U.S. Big Oil Index -2X Inverse Leveraged ETN (NRGZ - Free Report)
This ETN provides two times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index. It has AUM of $186.9 million and average daily volume of under 1000 shares. The note charges 95 bps in annual fees and has gained nearly 252.7% in a month.
MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN (NRGD - Free Report)
NRGD seeks to offer three times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $222.2 million in its asset base. It charges 95 bps in annual fees and trades in average daily volume of under 1,000 shares. NRGD soared 467.4% in the same timeframe.
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares (DRIP - Free Report)
This fund seeks three times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $83.4 million in its asset base and trades in a solid volume of around 466,000 shares a day on average. The fund charges 95 bps in annual fees (read: Leveraged or Inverse ETFs Gain Amid Market Crash).
Direxion Daily Energy Bear 3x Shares ETF (ERY - Free Report)
This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $97.1 million and trades in good volume of nearly 316,000 shares. The ETF charges annual fee of 95 bps and shot up 410% in a month.
ProShares Short Oil & Gas (DDG - Free Report)
This fund provides inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. It has amassed $6.9 million in AUM while volume is light around 4,000 shares. Expense ratio came in at 0.95%. It has gained 93.4% in the same time frame.
ProShares UltraShort Oil & Gas (DUG - Free Report)
This fund seeks two times inverse exposure to the Dow Jones U.S. Oil & Gas Index, charging investors 95 bps in fees. It has amassed $37.4 million in its asset base and trades in lower volume of more than 52,000 shares per day on average. DUG has returned 224% over the past month.
As a caveat, investors should note that such 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 Inverse Commodity ETFs here).
Still, for those ETF investors who are bearish on the energy sector, either of the above products could be an interesting choice. Clearly, a near-term short could be intriguing for those with high-risk tolerance, and a belief that the “trend is a friend” in this corner of the investing world.
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