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4 Inverse ETFs to Short Oil as Crude Prices Tumble

Madeleine Johnson

While a strong dollar and global growth concerns—slowdown worries in China, sluggish growth in Japan, and recessionary fears in Europe—are some of the factors behind the slump in demand, the U.S. shale gas boom has boosted U.S. oil output to the highest level in 30 years.

As a consequence to this increase in demand, oil from Saudi Arabia, Nigeria, and Algeria once sold in the U.S. are now competing in the growing Asian markets. Canadian and Iraqi oil exports have been rising continuously year after year, and even Russian production has managed to stay steady, despite the country’s economic problems.

Despite signs that production is falling—back in February, OPEC membersSaudi Arabia, Venezuela, and Qatar, along with Russia, announced a plan to freeze output at current levels—it was reported that a meeting between OPEC and non-OPEC countries is now unlikely to happen since Iran has not committed to halt its production levels.  This is not entirely surprising, as OPEC members in the past seemed to have been unable to agree on the best policy for dealing with the oil slide, and how to progress from this stalemate.

A drop in production is not happening quickly enough, delaying the likelihood that prices will fully recover any time soon. And given the current situation, investors might want to consider shorting oil. Though futures or short-stock are some of the possible ways for doing so, there are a host of short oil ETF options which may make more sense for many investors.
 
So, for investors seeking to make an inverse bet on oil, we have highlighted below four ETFs, any of which can be used to make a short play on oil. Investors, however, should keep in mind that a short play in the futures market requires a strong appetite for risks.
 
ProShares UltraShort DJ-UBS Crude Oil ETF SCO
 
SCO is the most popular option in the short oil ETF space having an asset base of $156.32 million. The fund tracks the Dow Jones-UBS Crude Oil Sub-Index to provide twice the inverse performance, on a daily basis of WTI crude oil. SCO’s average daily share volume is 672,199 over the past 45 trading days. SCO’s expense ratio stands at 1.15%.
 
DB Crude Oil Double Short ETN DTO
 
Investors seeking to use the ETN approach to inverse crude investing can consider DTO for exposure. The note follows a benchmark of crude oil futures contracts to provide -2x exposure. The note manages a small AUM of $92.64 million, with a low volume of about 25,712 shares a day. Also, DTO is relatively cheaper with an expense ratio of 0.75%.
 
PowerShares DB Crude Oil Short ETN SZO
 
SZO is the least risky bet in the space providing -1x short exposure to WTI crude. The ETN tracks the Deutsche Bank Liquid Commodity Index-Oil for this purpose, while it also adds in the yield from short-term T-bills. However, the product is quite unpopular with an asset base of just $20.68 million and trades with low volumes of 4,977 shares, which might result in additional costs in the form of wide bid-ask spreads. Expenses come in at 75 basis points annually.
 
VelocityShares 3x Inverse Crude ETN DWTI
 
DWTI is one of the riskier ways to play the short oil market, utilizing -3x exposure with daily rebalancing.  The fund tracks the S&P GSCI Crude Oil Index to provide exposure to crude oil. However, the product is quite unpopular with a low asset base of trading volume. Moreover, it is quite pricey charging 1.35% in annual fees.

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PRO-ULS BB CRUD (SCO): ETF Research Reports
 
VEL-3X INV CRD (DWTI): ETF Research Reports
 
DB CO SH (SZO): ETF Research Reports
 
DB CO DS (DTO): ETF Research Reports
 
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