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Oil Collapses to Bear Market: Bet on Inverse Energy ETFs

Sweta Killa

The energy sector has been going through tough times lately. This is especially true, as the ultra-popular Energy Select Sector SPDR XLE shed 7.3% over the past week compared to a loss of 3.2% for the broad market fund SPY. 

The steep decline came on oil price collapse given the dual attack by Fed and Trump that has resulted in fears of lower crude demand. In fact, oil price has entered a bear market, losing more than 20% since the 2019 peak in April.

Though Fed lowered interest rates for the first time in more than a decade, it dampened hopes of a string of rate cuts to shore up the economy, which is witnessing a slowdown and taking a toll on oil demand. Then, President Trump announced additional tariffs of 10% on the remaining $300 billion in Chinese goods effective September, which intensified concerns over global growth. This will weaken oil demand (read: Energy ETFs Crash on Rate Cut and New China Tariff).

Additionally, a recent wave of oil reports forecast a huge surplus in 2020, sending bearish signals. The International Energy Agency (IEA) stated that oil supply in the first six months of 2019 had exceeded demand by 0.9 million barrels per day. The “considerable oversupply” situation will likely continue in the remainder of this year and 2020, given higher production from the United States and some other countries as well as a drop in OPEC demand. In particular, the agency projects 2.1 million barrels per day expansion of non-OPEC oil supply next year, while OPEC crude oil demand could fall to only 28 million barrels per day in early 2020.

OPEC also expects global crude demand to drop in 2020 as non-OPEC nations push up production. It estimates global demand at 29.27 million barrels per day of crude from OPEC nations next year, suggesting a decline of 1.34 million barrels per day from 2019.

Added to the woes is the latest inventory report, which shows that U.S. crude stockpiles rose unexpectedly last week, increasing 2.4 million barrels compared to the analysts’ expectation of a decrease of 2.8 million barrels.

How to Play?

Amid bearish 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 (read: Markets Bleeding: Go Short With These ETFs).

Below, we have highlighted several leveraged ETFs and the key differences between them:

MicroSectors U.S. Big Oil Index Inverse ETN YGRN

This is an ETN option providing inverse exposure to the Solactive MicroSectors U.S. Big Oil Index. It has accumulated $53.8 million in its asset base since its inception in April 2019 and trades in a paltry daily volume of roughly 1,000 shares. The product charges 95 bps in fees per year from investors and is up 8.7% in a week.

MicroSectors U.S. Big Oil Index -2X Inverse Leveraged ETN NRGZ

This ETN provides two times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index. It has AUM of $57 million and average daily volume of under 500 shares. The note charges 95 bps in annual fees and gained nearly 18% in a week. 

MicroSectors U.S. Big Oil Index -3X Inverse Leveraged ETN NRGD

NRGD seeks to offer three times leveraged exposure to the Solactive MicroSectors U.S. Big Oil Index. The ETN has accumulated $59.6 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 27.8% in the same timeframe.

Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares DRIP

This fund seeks three times inverse exposure to the performance of the S&P Oil & Gas Exploration & Production Select Industry Index. DRIP has accumulated $31.9 million in its asset base and trades in a solid volume of around 793,000 shares a day on average. The fund charges 95 bps in annual fees (read: How to Trade Oil Rush With These ETFs).

Direxion Daily Energy Bear 3x Shares ETF ERY

This product provides three times inverse exposure to the Energy Select Sector Index. It has AUM of $27.1 million and trades in good volume nearly 182,000 shares. The ETF charges annual fee of 95 bps and has gained 24.3% in a week.

ProShares Short Oil & Gas DDG

This fund provides inverse exposure to the daily performance of the Dow Jones U.S. Oil & Gas Index. It has amassed $2 million in AUM while volume is light under 1,000 shares. Expense ratio came in at 0.95%. It has added 8.2% in the same time frame.

ProShares UltraShort Oil & Gas DUG

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 $19.3 million in its asset base and trades in lower volume of more than 36,000 shares per day on average. DUG has returned 16.5% over the past week.

Bottom Line

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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